This Cloud Company Offers a Potential 150% Gain
Trade summary: A bull call spread in NICE Ltd. (Nasdaq: NICE) using the September $220 call option which can be bought for about $5.80 and the September $230 call could be sold for about $1.80. This trade would cost $4 to open, or $400 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 $400. The maximum gain is $600 per contract. That is a potential gain of about 150% based on the amount risked in the trade.
Now, let’s look at the details.
NICE is breaking out to new highs.
The stock has been a market leader after rapidly recovering its bear market losses.
Recently, the company announced the launch of its newest platform, NICE Actimize Xceed, which integrates best-in-class AI, data intelligence, behavioral analytics, and insights within a unified cloud platform designed to bring agility to financial institutions of all sizes, including community and regional banks, that are looking to modernize their financial crime risk management solutions.
Xceed combines the most advanced capabilities of both Guardian Analytics and NICE Actimize providing full coverage for both anti-money laundering and fraud prevention.
With “Always On” AI-based technology, NICE Actimize Xceed’s self-learning capabilities immediately and autonomously adapt to new threats, helping financial institutions meet today’s dynamic risk management needs with laser accuracy, speed and simplicity, and without the need for a team of data scientists. The new platform, which includes the industry’s most advanced real-time behavioral analytics and machine learning capabilities, will offer simplified cloud deployments while optimizing operational resource efficiency.
The Xceed platform is the newest addition to the NICE Actimize offering and is joining X-Sight which is quickly becoming the leading platform for many of the largest financial services organizations worldwide.
With the addition of Xceed, NICE Actimize now brings its unmatched AI and cloud technologies to financial services of any size, meeting the unique requirements of small and mid-size organizations that can now enjoy capabilities which up until now were available only for organizations at large scale.
“We are pleased to bring our customers the unique combination of proven expertise with best-in-class innovation in both Artificial Intelligence and the cloud, presenting a major opportunity to further support financial services organizations of all sizes.
Xceed is based on the proven AI models deployed at hundreds of Guardian Analytics and Actimize customers, leveraging the best innovations of both and bringing the industry its most advanced machine learning capabilities for complete financial crime risk management coverage,” said Craig Costigan, CEO, NICE Actimize.
The long-term chart shows that NICE has been in a persistent up trend. The bear market tested support near $110 and the stock is now positioned for a move towards $250.
Valuation is a concern with the stock priced at about 40 times this year’s expected earnings. Managing risk is important and a spread trade meets that objective.
A Specific Trade for NICE
For NICE, the September 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 September $220 call option can be bought for about $5.80 and the September $230 call could be sold for about $1.80. This trade would cost $4 to open, or $400 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 $400.
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 NICE, the maximum gain is $600 ($230- $220= $10; 10- $4.00 = $6.00). This represents $600 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $400 to open this trade.
That is a potential gain of about 150% 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 NICE 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 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.