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Two Stay at Home Trends Collide to Create a possible Gain of 123%

Two Stay at Home Trends Collide to Create a possible Gain of 123%

Trade summary: A bull call spread in Roku, Inc. (Nasdaq: ROKU) using the August $160 call option which can be bought for about $17.19 and the August $165 call could be sold for about $14.95. This trade would cost $2.24 to open, or $224 since each contract covers 100 shares of stock.

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  • In this trade, the maximum loss would be equal to the amount spent to open the trade, or $224. The maximum gain is $276 per contract. That is a potential gain of about 123% based on the amount risked in the trade.

    Now, let’s look at the details.

    Roku was trading higher on significant news.

    ROKU daily chart

    The news, according to Business Wire, was that ROKU announced the availability of the Peloton App on the Roku platform. Roku users in the U.S. can add the Peloton channel via the Roku Channel Store and enjoy studio-style workouts in their living rooms – even without a Peloton Bike or Tread.

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  • A pioneer in connected, technology-enabled fitness, Peloton’s channel provides thousands of instructor-led, immersive workouts that can be done with or without equipment directly through Roku devices.

    The Peloton channel uses Roku Pay, enabling Roku customers to easily sign up with just a few clicks. Existing Peloton Members can also access the Peloton channel using their login credentials.

    With many streamers sheltering in place, time spent watching Health & Fitness programming in the U.S. has experienced significant growth in recent months.

    In the U.S, the Health & Fitness category experienced the largest growth in streaming on Roku devices year-over-year when compared to other genres on the platform, growing by more than 130% in May.

    “As people continue to stay home, the television is increasingly becoming their window to the world, providing virtual access to the gym, travel, food, learning, and more,” said Regina Breslin, Director of Content Acquisition, Roku.

    “Consumer appetite for compelling content has never been stronger and we’re focused on delivering programming Roku users want and love. We’re excited to bring Peloton’s incredible fitness programming available to millions of streamers.”

    “We are excited to roll out our best-in-class streaming fitness service onto the Roku platform,” said speloKarina Kogan, SVP & General Manager, Peloton Digital.

    “We’ve seen growing engagement with our TV apps, especially as more and more consumers look for at-home fitness solutions to keep them physically and mentally fit.”

    A recent performance analysis of more than five million Roku households identified as being likely to engage with health and fitness content found that more than half of the households were cord-cutters or cord-nevers.

    Reaching these streaming audiences offer incremental reach compared to linear cable audiences. At launch, Peloton will use Roku’s advanced machine learning targeting capabilities that analyze 100K+ unique data signals to optimize towards Peloton app installs and sign-ups.

    Peloton has also been a winner under the stay at home orders in place in many locations.

    PTON daily chart

    A Specific Trade for ROKU

    For ROKU, the August options allow a trader to gain exposure to the stock. This trade will be open for about six weeks and allows for traders to turn over capital quickly, potentially compounding gains several times a year.

    An August $160 call option can be bought for about $17.19 and the August $165 call could be sold for about $14.95. This trade would cost $2.24 to open, or $224 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 $224.

    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 ROKU, the maximum gain is $276 ($165- $160= $5; 5- $2.24 = $2.76). This represents $276 per contract since each contract covers 100 shares.

    Most brokers will require minimum trading capital equal to the risk on the trade, or $224 to open this trade.

    That is a potential gain of about 123% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.

    A Trade for Short Term Bulls

    As with the ownership of any stock, buying ROKU 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  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.

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