This Camera Maker Could Provide a Triple Digit Gain
Trade summary: A bull call spread in FLIR Systems, Inc. (Nasdaq: FLIR) using the June 17 $40 call option which can be bought for about $6.72 and the June 17 $45 call could be sold for about $4.30. This trade would cost $2.42 to open, or $242 since each contract covers 100 shares of stock.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $2.42. The maximum gain is $258 per contract. That is a potential gain of about 106% based on the amount risked in the trade.
Now, let’s look at the details.
FLIR jumped on news that Amazon was using the company’s thermal cameras at its warehouses to accelerate screening for employees who may have contracted coronavirus.
Amazon confirmed use of the equipment. The company explains they set up the hardware for the devices in at least six warehouses outside Los Angeles and Seattle, but Amazon did not confirm made the cameras.
One employee at a warehouse outside Seattle said the technology came from Infrared Cameras Inc.
“We are now implementing the use of thermal cameras for temperature screening to create a more streamlined experience at some of our sites,” Kristen Kish, an Amazon spokesperson, said in an emailed statement.
William Blair analyst Louie DiPalma said in a note to clients that even if the Seattle online retailer is using another company’s equipment, he expected FLIR, Wilsonville, Ore., to “benefit from what may become a major trend.”
“While Amazon may be using the thermal cameras to screen employees, there have been a multitude of reports of high-profile companies such as Wynn Resorts and Emirates Airlines screening customers,” DiPalma said. “We have received an inbound from [a National Basketball Association] team doing due diligence.”
“FLIR is the global leader in thermal uncooled cameras, which compose the largest portion of the thermal camera market by volume,” DiPalma wrote.
DiPalma, who gives FLIR an outperform rating, said the company’s chief executive, Jim Cannon, stated during the Feb. 27 fourth-quarter earnings call that potential sales of coronavirus-related FLIR thermal cameras were “not a needle mover.”
“However, the severity of covid-19 is now acutely worse compared with late February,” DiPalma said. “With visionary industry leaders such as Amazon now planning to use thermal cameras to screen employees on a daily basis, and other companies intending to screen customers, we now believe that temperature screening sales may be a material contributor to FLIR’s $1.8 billion in annual sales.”
The bounce comes as FLIR seems to be moving off a significant bottom.
A Specific Trade for FLIR
For FLIR, the June 17 options allow a trader to gain exposure to the stock. This trade will be open for about six weeks and allows for traders to turn over capital quickly, potentially compounding gains several times a year.
A June 17 $40 call option can be bought for about $6.72 and the June 17 $45 call could be sold for about $4.30. This trade would cost $2.42 to open, or $242 since each contract covers 100 shares of stock.
The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $2.42.
The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.
For this trade in FLIR the maximum gain is $2.58 ($45- $40= $5; 5- $2.42 = $2.58). This represents $258 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $242 to open this trade.
That is a potential gain of about 106% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.
A Trade for Short Term Bulls
As with the ownership of any stock, buying FLIR could require a significant amount of capital and exposes the investor to standard risks of owning a stock.
To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.
Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.
To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.
This strategy is designed to profit from a gain in the underlying stock’s price but FLIR the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.
Source: The Options Industry Council
Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.
This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.