This Tech Stock Offers Income of 78% In Less Than Two Months
Trade summary: A bear call spread in Qualys, Inc. (Nasdaq: QLYS) using June $100 call options for about $8 and buy a June $105 call for about $5.80. This trade generates a credit of $2.20, which is the difference in the amount of premium for the call that is sold and the call.
In this trade, the maximum risk is about $280. The risk can be found by subtracting the difference in the strike prices ($500 or $5.00 times 100 since each contract covers 100 shares) and then subtracting the premium received ($220). This trade offers a potential return of about 78% of the amount risked.
Now, let’s look at the details.
QLYS is a pioneer and leading provider of cloud-based IT, security and compliance solutions.
In a recent earnings announcement, according to PR Newswire,
“…the company reported revenues of $86.3 million, net income under GAAP of $18.7 million, non-GAAP net income of $26.7 million, Adjusted EBITDA of $38.2 million, GAAP earnings per diluted share of $0.46, and non-GAAP earnings per diluted share of $0.65.
“We are pleased to report another good quarter with accelerated growth in Qualys Cloud Agent subscriptions and strong adoption of our Vulnerability Management, Detection and Response (VMDR) app.
Our results reflect the strategic importance of our robust cloud platform for continuously securing and monitoring hybrid environments and remote workforces as well as the expansion of our product suite including our innovative VMDR app,” said Philippe Courtot, chairman and CEO of Qualys.”
Additional highlights include nearly 150 customers already subscribed to the VMDR app which helps proliferate Clouds Agents within our customer and also sets a strong foundation for further upsell of our other paid applications.
Free remote endpoint protection attracted nearly 500 new customers, and additional upsell opportunities.
New custo,ers included Armor Defense, Axfood AB, CarGurus, Cepsa, City of Charlotte, City of Raleigh, Equity Residential, KION Information Management Services GmbH, Oregon Department of Justice, Quest Software, Summa Health, and Volvo.
Interestingly, the company is confident enough to “announce our Board has authorized an additional 2 year $100 million open market share repurchase program, which reflects our belief in our cloud model to continue growing shareholder value as well as provides us with the opportunity to take advantage of any potential significant stock market dislocation.”
Despite the seemingly good news, traders sold the stock.
This could be the beginning of a significant retracement after the stock reached new highs ahead of the news and then sold off once the news was released. This pattern of “buy the rumor, sell the news” has a longstanding reputation of being a bearish setup in the market.
Buying shares of the stock exposes traders to significant risks in dollar terms. A spread trade with options allows traders to obtain exposure to the stock with a defined level of risk. That strategy is explained in detail below, at the end of this article.
A Specific Trade for QLYS
For QLYS, we could sell a June $100 call for about $8 and buy a June $105 call for about $5.80. This trade generates a credit of $2.20, which is the difference in the amount of premium for the call that is sold and the call.
Remember that each contract covers 100 shares, opening this position results in immediate income of $220. The credit received when the trade is opened, $220 in this case, is also the maximum potential profit on the trade.
The maximum risk on the trade is about $280. The risk can be found by subtracting the difference in the strike prices ($500 or $5.00 times 100 since each contract covers 100 shares) and then subtracting the premium received ($220).
This trade offers a potential return of about 78% of the amount risked for a holding period that is relatively brief. This is a significant return on the amount of money at risk. This trade delivers the maximum gain if QLYS is below $100 when the options expire, a likely event given the stock’s trend.
Call spreads can be used to generate high returns on small amounts of capital several times a year, offering larger percentage gains for small investors willing to accept the risks of this strategy. Those risks, in dollar terms, are relatively small, about $520 for this trade in QLYS.
A Trading Strategy To Benefit From Weakness
A price decline often results in higher than average options premiums. That means option buyers will be forced to pay higher than average prices for trades, But, sellers could benefit from the higher premiums.
In this case, with a bearish outlook for the short term, a call option should be sold. The call should decline in value if the stock declines and sellers of calls benefit from this decline.
Selling options can involve a great deal of risk. A spread options strategy can be used to limit the potential risk of the trade.
One strategy that traders can consider is the bear call spread. This is a trade that uses two calls with the same expiration date but different exercise prices.
Traders buy one call and sell another call. The exercise price of the call you sell will be below the exercise price of the long call. The call is sold to limit the risk of the trade. So, this strategy will always generate a credit when it is opened and will always have limited risk.
The risk profile of this trading strategy is summarized in the diagram below which shows the limited risk and reward.
While risks and rewards are limited, this strategy will allow traders to generate potential gains in a stock they might otherwise find too risky to trade. Many individuals ignore bearish strategies because of the risks.
You’ll know the maximum potential gain with this strategy as soon as it’s opened. It is equal to the amount of premium received when the trade is opened. The maximum loss is equal to the difference between the exercise price of the options contracts less the premium received and is also known.