This Company’s Breach Could Deliver Gains to Investors
You may have seen the news. Or, you may even be among the individuals involved in the data breach. This one is so large, it’s likely many unsuspecting customers of the company had data compromised.
Marriot’s Parent Company Stumbles
The news was summarized in this report from Tech Crunch,
“Starwood Hotels has confirmed its hotel guest database of about 500 million customers has been stolen in a data breach.
The hotel and resorts giant said in a statement filed with U.S. regulators that the “unauthorized access” to its guest database was detected on or before September 10 — but may have dated back as far as 2014.
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“Marriott learned during the investigation that there had been unauthorized access to the Starwood network since 2014,” said the statement.
“Marriott recently discovered that an unauthorized party had copied and encrypted information, and took steps towards removing it.”
Specific details of the breach remain unknown.
The company said that it obtained and decrypted the database on November 19 and “determined that the contents were from the Starwood guest reservation database.”
Hundreds of Millions Could Be Affected
Some 327 million records contained a guest’s name, postal address, phone number, date of birth, gender, email address, passport number, Starwood’s rewards information (including points and balance), arrival and departure information, reservation date, and their communication preferences.
Starwood said an unknown number of records contained encrypted credit card data but has “not been able to rule out” that the components needed to decrypt the data wasn’t also taken.
“Marriott reported this incident to law enforcement and continues to support their investigation,” said the statement.
Marriott-owned Starwood is the largest hotel chain in the world, with more than 11 brands covering 1,200 properties, including W Hotels, St. Regis, Sheraton, Westin, Element and more. Starwood branded timeshare properties are also included.
The company said that its Marriott hotels are not believed to be affected as its reservation system is “on a different network,” following Marriott’s acquisition of Starwood in 2016.
The company has begun informing customers of the breach — including in the U.S., Canada, and the U.K.
Given that the breach falls under the European-wide GDPR rules, Starwood may face significant financial penalties of up to four percent of its global annual revenue if found to be in breach of the rules.
That could hurt the stock and traders reacted to the news by selling.
The selloff comes as the stock is in a down trend. Prices made a series of lower highs and lower lows throughout the past year. That is the simplest definition of a down trend, but it is also the most reliable.
A Trading Strategy to Benefit from Weakness
A price decline often results in higher than average options premiums. That means option buyers will be forced to pay higher than average prices for trades, But, sellers could benefit from the higher premiums.
In this case, with a bearish outlook for the short term, a call option should be sold. The call should decline in value if the stock declines and sellers of calls benefit from this decline.
Selling options can involve a great deal of risk. A spread options strategy can be used to limit the potential risk of the trade.
One strategy that traders can consider is the bear call spread. This is a trade that uses two calls with the same expiration date but different exercise prices.
Traders buy one call and sell another call. The exercise price of the call you sell will be below the exercise price of the long call. The call is sold to limit the risk of the trade. So this strategy will always generate a credit when it is opened and will always have limited risk.
The risk profile of this trading strategy is summarized in the diagram below which shows the limited risk and reward.
Source: The Options Industry Council
While risks and rewards are limited, this strategy will allow traders to generate potential gains in a stock they might otherwise find too risky to trade. Many individuals ignore bearish strategies because of the risks.
You’ll know the maximum potential gain with this strategy as soon as it’s opened. It is equal to the amount of premium received when the trade is opened. The maximum loss is equal to the difference between the exercise price of the options contracts less the premium received and is also known.
A Bear Call Spread in MAR
For MAR, we could sell a December 14 $120 call for about $2 and buy a December 14 $122 call for about $1.10. This trade generates a credit of $0.90, which is the difference in the amount of premium for the call that is sold and the call.
Remember that each contract covers 100 shares, opening this position results in immediate income of $90. The credit received when the trade is opened, $90 in this case, is also the maximum potential profit on the trade.
The maximum risk on the trade is about $110. The risk can be found by subtracting the difference in the strike prices ($200 or $2.00 times 100 since each contract covers 100 shares) and then subtracting the premium received ($90).
This trade offers a potential return of about 81% of the amount risked for a holding period that is about five weeks. This is a significant return on the amount of money at risk. This trade delivers the maximum gain if MAR is below $120 when the options expire, a likely event given the stock’s trend.
Call spreads can be used to generate high returns on small amounts of capital several times a year, offering larger percentage gains for small investors willing to accept the risks of this strategy. Those risks, in dollar terms, are relatively small, about $110 for this trade in MAR.
These are the type of strategies that are explained and used in our TradingTips.com’s Options Insider service. To learn more about how options can be used to meet your income and wealth building goals, click here for details on Options Insider.