The Spread Trader: Bull Call Spread On TIBCO Software (TIBX)

| January 28, 2013 | 0 Comments

TIBCO technologyTIBCO Software (TIBX) was on quite a roll going into 2012.  And for good reason…

TIBCO’s “two-second advantage” gives their customers the ability to capture the right information, at the right time, and act on it preemptively for a competitive advantage.

As their CEO, Vivek Ranadive, puts it…  “A little bit of the right information just a little bit beforehand – whether it is a couple of seconds, minutes, or hours – is more valuable than all of the information in the world six months later.”

Think about it like this… 

You’re shopping for a book about baseball on Amazon.  After you find the one you’re looking for – but before you pay – Amazon shows a list of other books people who also bought that book purchased.

They know there’s a good chance one of those books will also catch your attention.  So, you end up buying two books instead of one.  That’s the beauty of predicting your customers’ behavior.  They’re more likely to find something they didn’t even know they wanted before they started shopping.

In the end, it improves their customer’s shopping experience and Amazon makes bigger sales.  And what business doesn’t want happier customers and bigger sales!  

As a result, TIBX was able to beat analysts’ estimates 17 quarters in a row!       

But the stock hit some turbulence mid-year… That’s when global economic uncertainty really started to cut into estimates for business tech investment.  And things went from bad to worse for TIBX when they fell short of analyst estimates in December.

But here’s the thing…

The explosion of social networking sites like Facebook (FB) and Twitter are generating massive amounts of data.  And that data is being created by customers.

But most businesses aren’t equipped with the right technology to capitalize on that information.  TIBCO’s technology allows businesses to analyze that data in real-time and tailor specific offerings to those customers. 

Obviously, monetizing all the data companies collect about their customers strikes at the heart of the biggest challenges most companies face today.  It’s easy to see how this innovative technology is in high demand.  And they’re capturing new clients by the handful.

In fact, the market for TIBX’s technology is stronger than ever.  The reason TIBX came up short last quarter was because the company didn’t execute.  However, I think they will fix these issues and get back to outperforming expectations when they report earnings in March.

This looks like a great opportunity for a bull call spread on TIBX.  This bullish strategy is made by buying one call option and selling another call option with a higher strike price.

Here’s what to do now…

Buy the TIBX May 2013 $26 call for $1.41 and sell the TIBX May 2013 $31 call for $0.25.

Remember, when buying a call spread, the maximum profit is the difference between the strike prices minus the amount paid for the spread.

This trade costs us $116 ($141 – $25) per contract.  Our breakeven on the trade is $27.16.  If TIBX is trading at exactly $27.16 on May 17th, we’ll get our $116 back.

 We’ve also limited our risk to our initial $116 investment.  If TIBX is trading below $26 on May 17th, we’ll lose $116.  But no matter how far TIBX falls, we can never lose more than our initial investment.

Now for the good part… profits!

Our maximum profit of $384 comes if TIBX is trading at or above $31 on May 17th

In other words, we’re risking $116 for a chance to make $384.  According to our tracking system, there’s a 38% chance of this trade making money.  That’s a good risk/reward in my book.

Good Investing,

Corey Williams

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Category: The Spread Trader

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.