This Company’s Move to Combat Higher Interest Rates Could Help Traders Profit
Higher interest rates threaten to squeeze companies in some industries. In particular, companies associated with real estate might see a negative impact on their operations as the Federal reserve continues to raise interest rates.
Higher rates can price some potential home buyers out of the market. This is simply because higher interest rates lead to higher mortgage payments and without salaries moving up, many consumers will find themselves priced out of the market.
This will affect real estate agents, home builders and other companies involved directly in matching buyers and sellers. A slowdown could also affect lenders in the mortgage markets. That is why at least one company involved in that market is seeking to diversify its operations.
Lending Tree Looks Beyond Lending
LendingTree, Inc. (Nasdaq: TREE) is engaged in operating an online loan marketplace for consumers seeking loans and other credit-based offerings.
The company’s online marketplace provides consumers with access to product offerings from various lenders, which it refers to as Network Lenders, including mortgage loans, home equity loans and lines of credit, reverse mortgage loans, auto loans, credit cards, personal loans, student loans, small business loans and other related offerings.
In addition, the company offers tools and resources, including free credit scores that facilitate comparison shopping for these loans and other credit-based offerings.
Recently, TREE took steps to expand its operations in a step that could help it increase revenue and earnings even if the market for mortgages shrinks in the face of higher rates.
In an effort to diversify its product portfolio and expand in the insurance industry, Zacks reported that TREE “has agreed to acquire one of the largest online insurance comparison marketplaces, QuoteWizard.com, LLC.
The deal is expected to be completed by fourth-quarter 2018 and is subject to customary closing conditions.
Per the agreement, the total equity purchase consideration is $370.2 million. Of this, $300 million will likely be paid in cash at the time of the deal closure along with contingent payments of up to $70.2 million. This is subject to the achievement of some growth targets of the company for over 3 years.
Notably, the acquisition is expected to be accretive to LendingTree’s adjusted earnings per share (EPS) in 2019.
Founded in 2006, QuoteWizard successfully helped almost 40 million customers in finding ideal insurance policy. At the end of the first half of 2018, QuoteWizard had $75.6 million in revenues and nearly $12.8 million in Adjusted EBITDA.
The founder and CEO of LendingTree, Doug Lebda stated, “By acquiring QuoteWizard, LendingTree will establish itself as a leading player in the online insurance advertising industry, while continuing our ongoing diversification within the financial services category.”
Lebda added, “With QuoteWizard’s proprietary technology platform, direct relationships with over 30 of the top-tier carriers and a network of nearly 10,000 agents, combined with LendingTree’s strong brand and extensive reach, we will be well-poised to capitalize on the growing market opportunity that stems from the ongoing digitalization of the financial services industry.”
For the transaction, Bank of America’s BAC Merrill Lynch advised LendingTree. On the other hand, QuoteWizard was advised by GCA Advisors, LLC.
Notably, LendingTree’s inorganic growth strategies remain impressive. While higher costs due to advertising are likely to hurt the company’s bottom line, its commitment to expand product offerings beyond mortgage-related products bodes well for the long term.”
The stock was higher on the news.
This move comes as the stock was testing support and could indicate an extended down trend in price is at an end.
However, the risks remain high and an options strategy could reduce the risk of the trade.
Trading the Trend Reversal
When a stock is expected to move higher, traders could consider obtaining long exposure to the stock to profit. A number of options strategies could be used to meet this objective.
Among those strategies is a bull put spread that could be used. The risk and reward diagram is shown below and it offers limited risk with limited potential gains. However, it is well suited for a stock which is in an uptrend.
Source: The Options Industry Council
This strategy involves two put options. One put option is bought and a second put option with the same expiration date but with a higher exercise price is sold. Selling the put option will generate immediate income, just like the more familiar covered call strategy would. But, unlike a covered call, risk is limited.
Many traders will be familiar with the idea of a covered call. This is a conservative strategy many long-term investors use to generate income in stocks they own that are unlikely to make large moves.
Although the bull put spread is different than a covered call, the bull put spread strategy meets the same objective as the covered call which is to generate some income. This trade generates immediate income and carries limited risk.
A Specific Trade for TREE
For TREE, a bull put spread could be opened with the November 16 put options. This trade can be opened by selling the November 16 $210 put option for about $4.50 and buying the November 16 $200 put for about $2.00.
This trade would result in a credit of $2.50, or $250 per contract since each contract covers 100 shares. That amount is also the maximum potential gain of the trade.
The maximum possible risk is the difference between the exercise prices of the two options less the premium received. For this trade, the difference between exercise prices is $10 ($210 – $200). This is multiplied by 100 since each contract covers 100 shares.
Subtracting the premium from that difference means, in dollar terms, the total risk on the trade is then $750 ($1,000 – $250).
The potential gain is about 33% of the amount of capital risked. This trade will be for about one week and the annualized rate of return provides a significant gain.
The bull put spread is an example of how options are a versatile tool and could meet many of your trading objectives. In this trade, options provide income and defined risk that could be lower than owning the stock. This strategy also has a high probability of success.
These are the type of strategies that are explained and used in TradingTips.com’s Options Insider service. To learn more about how options can be used to meet your goals, click here for details on Options Insider.