This Stock Broke Out On Earnings
When a trader has multiple signals, that could indicate a less risky trade. In this article, we look at a stock with good news and that news prompted a bullish break out on the stock chart.
Yeti Reports Earnings
Austin Business Journal reported,
“Yeti Holdings Inc. (NYSE: YETI) has climbed after the Austin-based maker of high-end coolers, cups and other products released fourth-quarter financial results last month.
Yeti’s net sales leapt 19 percent to $241.2 million in the fourth quarter, compared with $202.1 million for the same period in 2017. Net income also skyrocketed, shooting up 533 percent to $25.2 million.
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“Looking ahead, we’ll continue to find places where the Yeti brand belongs and where we can change the nature of a consumer’s engagement with a product. As an innovator, that mindset is incredibly important to us,” President and CEO Matt Reintjes said on a [recent] conference call….
“That’s what keeps us authentic and what keeps our customers excited to come back for more.”
Also on the call was Tom Shaw, Yeti’s new vice president of investor relations. He previously held the same role at Starbucks Corp. With the earnings, Yeti also announced a new addition to its board of directors: Mary Lou Kelley, president of e-commerce at Best Buy Co. Inc. from 2014 until 2017.
Yeti’s adjusted net income for the fourth quarter was 38 cents per diluted share, which surpassed the FactSet consensus expectation of 35 cents, MarketWatch reported.
For all of 2018, Yeti brought in revenue of $778.8 million, up 22 percent year-over-year. That’s an important snapshot of renewed customer interest in the brand, after net sales fell from $818.9 million in 2016 to $639.2 million in 2017.
Yeti also increased its 2019 sales growth forecast from growth of 11.5 percent to growth of 13 percent, in line with the FactSet implied 11.5 percent consensus, according to MarketWatch.
Founded in 2006, Yeti has expanded beyond its original focus on coolers into other products such as drink tumblers, backpacks, blankets and even dog bowls.
“We’re extremely proud of our product development track record as this is the cornerstone of our brand,” Reintjes said on Thursday’s conference call.
“In the fourth quarter and throughout 2018, we continued to see traction of our legacy products while also generating strong enthusiasm for new introductions.”
Yeti went public in October.
The stock has been volatile but moved in line with broad market trends. The recent news completes a small consolidation on the daily chart.
Trading the Trend
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 up-trend.
Source: The Options Industry Council
A bull put spread involves being short a put option and long another put option with the same expiration but with a lower strike. The short put generates income, whereas the long put’s main purpose is to offset assignment risk and protect the investor in case of a sharp move downward.
Because of the relationship between the two strike prices, the investor will always receive a premium (credit) when initiating this position.
This strategy is in many ways 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.
This strategy entails precisely limited risk and reward potential. The most this spread can earn is the net premium received at the outset, which is likeliest if the stock price stays steady or rises.
If the forecast is wrong and the stock declines instead, the strategy leaves the investor with either a lower profit or a loss. The maximum loss is capped by the long put.
A Specific Trade for YETI
Every day, we scan the markets looking for trades that carry 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 YETI, a bull put spread could be opened with the April 18 put options. This trade can be opened by buying the April 18 $25 put option for about $0.75 and selling the April 18 $35 put for about $6.40.
This trade would result in a credit of $5.65, or $565 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 ($35 – $25). 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 $925 ($1,000 – $75).
The potential gain is about 61% of the amount of capital risked. This trade will be open for a relatively short amount of time 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.