This Retailer Could Deliver a Triple Digit Return on Investment
Retailers are hit and miss this time of year. Consumers tend to find that many stores are filled with bargains while others are filled with messy shelves and inadequate supplies of products that are in demand.
While the mess of the picked over store shelves might not be visible online, retailers can still suffer from this problem on web sites that show products are not in stock or where shipping delays indicate the retailer has inventory problems.
But, for some retailers, they seem to be delivering exactly what consumers need and are doing it when consumers want it.
The Boston Business Journal reported,
Wayfair Inc. (NYSE: W) [recently said] that sales increased 58 percent year-over-year during the crucial five-day shopping period after Thanksgiving.
The announcement sent Wayfair’s stock price surging, erasing some of the losses that shareholders of the online seller of home furnishing have experienced in the past few months.
Wayfair didn’t disclose revenue numbers specifically for Black Friday and Cyber Monday, but the company reported revenue of $1.44 billion during the fourth quarter of 2017. In 2017, the company reported year-over-year growth of 53 percent during the post-Thanksgiving shopping boom.
“We anticipated the continued shift of dollars online and were well positioned to capture that growth on Black Friday and throughout the weekend with an unprecedented number of flash deals and holiday promotions,” said co-founder and CEO Niraj Shah in a prepared statement.
“As the broader shift from brick and mortar to online shopping continues to gain momentum, Wayfair is capturing a leading market share in the home goods category.”
Among other tidbits, Wayfair reported that shoppers bought a Christmas tree from the site every 10 seconds on average during Cyber Monday.
The broad move to online shopping means that e-commerce companies typically break their own records each year during Black Friday and Cyber Monday sales.
Amazon.com Inc. also announced this week that Cyber Monday was the biggest shopping day in its history, though it didn’t release specific sales or growth numbers.
The question for investors, and traders is what the next move in the stock is likely to be. The weekly chart below shows that the stock price seems to have found support and could move higher from here.
A race towards expected resistance near $100 a share is possible as the retail sector basks in news of a strong holiday shopping season.
A Trade for Short Term Bulls
As with the ownership of any stock, buying W 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 W
For W, the January 18 options allow a trader to gain exposure to the stock.
A January 18 $87.50 call option can be bought for about $6.90 and the January 18 $89.50 call could be sold for about $6. This trade would cost $0.90 to open, or $90 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 $90.
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 W the maximum gain is $1.10 ($89.50 – $87.50 = $2.00; $2.00 – $0.90 = $1.10). This represents $110 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $90 to open this trade.
That is a potential gain of about 122% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.
In this trade, options provide income and defined risk. These are the type of strategies that are explained and used in TradingTips.com’s Extreme Profits Calendar service. This service uses seasonals as one indicator in its trade selection process. To learn more about how options can be used to meet your goals, click here for details on Extreme Profits Calendar.