This Leading Edge Tech Company Leaps Higher
Successful companies adapt to changing market conditions. For traders, this creates opportunities in the companies that successfully adapt. It also creates opportunities in companies that help guide other companies to growth.
One example of the latter is PROS Holdings Inc. (NYSE: PRO), a company that provides price optimization, sales effectiveness, and revenue management software as a service (SaaS) software.
PROS is headquartered in Houston, Texas with offices in San Francisco, California, Skokie, Illinois, London, UK, Toulouse and Paris, France, Sydney, Australia, and Sofia, Bulgaria.
After helping pioneer revenue management in the airline and hospitality industries, PROS moved into price management and price optimization by combining pricing science with software automation designed to help businesses increase revenue and profitability through improved pricing practices.
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The company recently announced earnings and as Business Wire reported,
“PROS Holdings, Inc., a provider of AI-powered solutions that optimize selling in the digital economy, announced financial results for the second quarter ended June 30, 2019.
Total revenue of $63.9 million, up 35% year-over-year. Subscription revenue of $33.1 million, up 50% year-over-year. Subscription gross margins of 70% and non-GAAP subscription margin of 73%, up more than 700 basis points year-over-year.
The company successfully completed an offering of $143.8 million aggregate principal amount of convertible senior notes due in 2024 in a private placement.
PROS then used a significant portion of the net proceeds from the offering to retire the majority of PROS’ outstanding 2.0% Convertible Senior Notes due in 2019.
“Companies across industries are realizing they must transform how they sell in today’s digital economy,” stated CEO Andres Reiner.
“These companies are turning to our AI solutions to power their digital selling strategies, which is accelerating our growth. We’re also proud to be recognized as the clear market leader in G2 Crowd’s Summer 2019 Evaluation of Pricing Optimization & Management Software.”
Traders seemed to react to the earnings announcement by buying. They pushed the stock price out of a trading range on the news.
The longer term chart using weekly data confirms the bullish price action in the stock. However, some traders may be concerned the stock is extended after its run and worried about risk.
A Trade for Short Term Bulls
As with the ownership of any stock, buying PRO 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.
A Specific Trade for PRO
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 PRO, the September 20 options allow a trader to gain exposure to the stock.
A September 20 $75 call option can be bought for about $1.72 and the September 20 $80 call could be sold for about $0.52. This trade would cost $1.20. to open, or $120 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 $120.
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 PRO the maximum gain is $3.80 ($80 – $75 = $5; $5- $1.20 = $3.80). This represents $380 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $120 to open this trade.
That is a potential gain of about 216% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.