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This Financial Combination Could Deliver A 300% Gain

This Financial Combination Could Deliver A 300% Gain

Recent news seemed rather benign, The Business Wire headline noted “Appointments mark progress in the integration of the Wells Fargo Institutional Retirement & Trust business.” The story was equally detailed:

“Principal announced additions to its Retirement & Income Solutions leadership teams – bringing on-board top talent from Wells Fargo Institutional Retirement & Trust (Wells Fargo IRT) and establishing a unified team to lead the integrated organization in the future.

“We are excited about the progress we are making toward closing this acquisition and thoughtfully integrating two very successful businesses and talented teams,” said Renee Schaaf, president of Retirement & Income Solutions.

“The Wells Fargo IRT leaders who will join Principal have deep expertise, industry knowledge and proven experience that will support our ability to bring more solutions, choice and service to clients – no matter their size or complexity of needs.”

Principal and Wells Fargo IRT are well-positioned to close the acquisition in early third quarter, pending regulatory approval.

Aligning the right leadership teams now, before close, will help ensure minimal client disruption, retain key institutional knowledge and experience, and leverage the experiences of leaders who have managed integration and client and employee transitions in the past.

The acquisition agreement allows a long transition period. During this time, product offerings and service teams will remain consistent for clients while Principal and Wells Fargo IRT bring together capabilities from both organizations to create new value in the marketplace.

“Our focus remains on bringing the best-of-the-best from both businesses together as we build out a leading retirement organization committed to helping people to live their best lives,” said Schaaf.

“Combined we will have unmatched capabilities to meet the needs of all customer segments with comprehensive retirement, trust & custody, executive benefits and discretionary asset management offerings.”

The incoming Wells Fargo IRT leaders announced today will become part of established leader teams with the Principal Retirement & Income Solutions business headed by Schaaf as president of Retirement & Income Solutions, Jerry Patterson, SVP of Workplace Savings & Retirement Solutions, and Sri Reddy, SVP of Income Solutions.

Additional leadership appointments will be made post-closing and throughout the transition process. Further details regarding the leadership structure and integration of the Wells Fargo deferred executive compensation and discretionary asset advisory businesses will be shared in the weeks to come as the two businesses continue to work toward integration.”

The stock was little changed on the news.

PFG daily chart

The longer-term chart shows the stock is near an important resistance level and a break to the up side could lead to technical buying.

PFG weekly chart

A Trade for Short Term Bulls

As with the ownership of any stock, buying PFG 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.

bull call spread

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.

A Specific Trade for PFG

Every day, we scan the markets looking for trades with low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.

When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.

For PFG, the October 18 options allow a trader to gain exposure to the stock.

An October 18 $60 call option can be bought for about $1.45 and the October 18 $65 call could be sold for about $0.45. This trade would cost $1.00 to open, or $100 since each contract covers 100 shares of stock.

The amount paid to enter the trade is the largest possible loss on the trade in PFG. 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 $100.

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 PFG the maximum gain is $4.00 ($65 – $60= $5; $5 – $1.00 = $4.00). This represents $400 per contract since each contract covers 100 shares.

Most brokers will require minimum trading capital equal to the risk on the trade, or $100 to open this trade.

That is a potential gain of about 300% in PFG, based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.