This Could Be a Vaccine Trade with a Possible Gain of 63%
Trade summary: A bull call spread in Chart Industries, Inc. (Nasdaq: GTLS) using the November $85 call option which can be bought for about $5.55 and the November $90 call could be sold for about $3.65. This trade would cost $1.90 to open, or $190 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 $190. The maximum gain is $310 per contract. That is a potential gain of about 63% based on the amount risked in the trade.
Now, let’s look at the details.
One of the potential challenges with a coronavirus vaccine is distribution. Vaccines may need to be stored at very low temperatures, requiring specialized equipment for transportation. That makes a recent story on GlobeNewswire potentially interesting to traders.
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“GTLS completed the acquisition of the Theodore, Alabama cryogenic trailer and hydrogen trailer (transport) assets of Worthington Industries, Inc. (NYSE: WOR).
This acquisition includes ownership of the Theodore, Alabama manufacturing site, all trailer-related intellectual property, manufacturing capabilities, equipment and repair backlog. The facility has approximately 300,000 square feet under roof adjacent to the Port of Mobile, and the associated employees will join the Chart team.
This acquisition will produce strong synergies by combining Chart’s deep knowledge of cryogenics and liquid hydrogen storage and handling with the Theodore operation’s expertise and experience in the packaging and assembly of liquid hydrogen trailers.
The addition of the trailer business to Chart’s hydrogen equipment and solution offering expands our mobile equipment to larger sized transports and brings another location already certified by significant hydrogen customers. Expected Chart hydrogen-related revenue from this facility in 2021 is $15 to $20 million with upside potential to $30 million in 2021.
“Owning this strategically located site near the Port of Mobile will grow our manufacturing capacity for Chart’s LNG products including tender cars for locomotive fueling and onboard storage tanks for marine fueling applications and expand our repair, service and leasing footprint (plenty of products to roll into this site (pun intended!)),” said Jill Evanko, Chart’s CEO & President.
“In particular, we will be able to provide expanded options for our North, Latin and Central American customers, including shorter lead-times of our ISO containers for LNG built in our Changzhou, China facility and stored onsite in Alabama.”
The stock is trading near the upper edge of a trading range.
The longer-term chart below using weekly data shows that the stock remains well below its 2018 highs. Any advance could stall there, as that is an expected resistance level where sellers could appear, since long-term holders would break even at that price.
Despite limited upside potential, a spread trade could increase possible returns.
A Specific Trade for GTLS
For GTLS, the November 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 November $85 call option can be bought for about $5.55 and the November $90 call could be sold for about $3.65. This trade would cost $1.90 to open, or $190 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 $190.
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 GTLS, the maximum gain is $310 ($90- $85= $5; 5- $1.90 = $3.10). This represents $310 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $190 to open this trade.
That is a potential gain of about 63% 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 GTLS 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 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.