This Company Could Benefit From the Market Crash
Trade summary: A bull call spread in LPL Financial Holdings Inc. (Nasdaq: LPLA) using the April 17 $60 call option which can be bought for about $5.43 and the April 17 $65 call could be sold for about $3.90. This trade would cost $1.53 to open, or $153 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 $153. The maximum gain is $347 per contract. That is a potential gain of about 126% based on the amount risked in the trade.
Now, let’s look at the details.
GlobeNewswire recently reported on growth of a financial advising powerhouse. This is important because advisers can be helpful to investors at times when markets crash and individual investors who expected steady gains scramble for assistance and guidance on how they can recover.
The report noted that LPL “announced that SilverRock Wealth Partners has joined LPL Financial’s broker-dealer, aligning with Independent Advisor Alliance (IAA), an enterprise registered investment advisor (RIA) firm offering support and services to advisors leveraging LPL Financial’s platform.
The advisors reported having served approximately $150 million in brokerage and advisory assets. They join from Spire Securities and used TD Ameritrade as their custodian.
Founded by President and CEO Derek Copeland, the Charlotte-based team serves many NFL clients and other professional athletes. Copeland’s fellow financial professionals both have sports backgrounds: Chris Carpenter pitched for the Boston Red Sox and Brenton Bersin is a former Carolina Panthers wide receiver. They are joined by operations manager Lisa Oviatt and Lori Copeland, director of marketing.
“Our business is less about investment management and more about lifestyle management,” Copeland said. “Our job is to provide highly personalized and proactive financial guidance to help clients manage their income wisely and stretch out earnings over a lifetime.”
LPL Financial Holdings Inc. is a broker-dealer, a custodian for registered investment advisors and an independent consultant to retirement plans. The company provides a platform of brokerage and investment advisory services to independent financial advisors, including financial advisors at financial institutions across the country.
It also supported approximately 4,000 financial advisors, affiliated and licensed with insurance companies through customized clearing services, advisory platforms and technology solutions. Through its advisors, it is a distributor of financial products and services in the United States.
It provides its technology and service to advisors through a technology platform that is server-based and Web-accessible. Its technology offerings are designed to permit its advisors to manage various aspects of their businesses. It automates time-consuming processes, such as account opening and management, document imaging and account rebalancing.
The news comes as the stock has been in a down trend along with the broad market.
The stock is now at 2018 levels which offers potential support.
A Specific Trade for LPLA
For LPLA, the April 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.
An April 17 $60 call option can be bought for about $5.43 and the April 17 $65 call could be sold for about $3.90. This trade would cost $1.53 to open, or $153 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 $153.
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 LPLA the maximum gain is $3.47 ($65- $60= $5; $5 – $1.53 = $3.47). This represents $347 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $153 to open this trade.
That is a potential gain of about 126% 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 LPLA 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 has 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.