Shift4 was Friday's Stock Of The Day and is showing excellent relative strength as it tries to form a new base.
According to the IBD Stock Checkup, FOUR stock is ranked No. 2 in its industry group and has a Composite Rating of 93, and EPS Rating of 74 and a Relative Strength Rating of 90.
Investors who think FOUR stock will continue to rally and don't want to risk significant capital can use long call options rather than buy the stock outright. This can be a good way to protect precious capital while the market uptrend is under pressure.
A call option is a contract between a buyer and seller. The contract gives the buyer the right to purchase a certain stock at a certain price (strike price) up until a certain date (expiration date).
One of the benefits of call options is that they provide leverage (which can be both a good and a bad thing depending how the trade plays out).
$5,400 Vs. $1,910 To Invest In The Stock
Assuming an investor wanted to buy 100 shares of Shift4, he or she would have to invest around $5,400 at Friday's closing share price.
Instead, the investor could gain a similar exposure using a fraction of the capital by buying a call option. One call option gives the investor exposure to 100 shares.
If investors were to buy one 40-strike call option on FOUR stock expiring on July 21, they would only need to invest around $1,910 rather than $5,400.
The break-even price for this call option is equal to the strike price plus the premium paid, which would make the break-even price 59.10.
The most the trade can lose is the premium paid of $1,910, which would occur if Shift4 finished below 40 on July 21.
Unlimited Upside With Call Option
However, if FOUR stock shoots higher, the upside is unlimited.
Using options in this way can be a great way to gain exposure to a stock without risking as much capital as would be required to buy the stock outright.
Savvy traders can further reduce the risk by selling an out-of-the-money call, turning the trade into a bull call spread.
For example, selling the July 21, 70 call would reduce the trade cost by around $570 but would also limit the upside above 70.
A stop loss could be set if FOUR stock drops 8% from the entry point.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ.
