Key points
- UiPath is a global leader in robotic process automation (RPA) and business process automation (BPA) platforms, benefiting from artificial intelligence (AI) and secular automation tailwinds.
- UiPath reports post-market earnings on March 13, 2024, with analysts’ EPS expectations of 16 cents and revenue of $383.6 million.
- A $24.50/$25.50 call debt spread pays a 1 in 2 risk/reward if PATH closes above $25.50 at expiration.
- 5 titles we like most about UiPath
Reactions to trading earnings reports are one of the riskiest trading strategies. However, when asymmetric risk and reward apply favorably, upside gains and downside risk are defined and limited. The upside reward is evident if the stock forms a price gap that continues to rise. However, the downturn can be harmful if the stock falls and continues to fall. Therefore, buying stocks for earnings is often avoided by traders.
You can limit some of your risk with directional call options, but you will lose your entire investment if the stock reacts negatively, especially if it was an out-of-the-money (OTM) call option with a high premium. However, if you are willing to limit your upside while limiting your downside to a 2 to 1 ratio, then an asymmetric risk-reward situation arises using call debit spreads.
What is the call charge spread?
A call debt spread allows you to get upside on the underlying stock price gain, but limits your downside if the stock crashes. It also allows you to make long calls at a lower cost. A call debit spread includes 2 legs: a long OTM call and a short OTM call.
Is UiPath Overlooked Among AI Stocks?
UiPath Inc. NYSE: PATH is a leader in artificial intelligence (AI)-based robotic process automation (RPA) and business process automation (BPA) platforms in the industry IT and technology sector. A recent MarketBeat Original article by Chris Markoch explores how Cathie Wood, head of ARK Investment Management, believes in UiPath as it is her second-largest holding in her country Innovation Ark ETF NYSEARCA: ARKK.
UiPath benefits from two age-old tailwinds: artificial intelligence and automation. The company is expected to report its earnings after the bell on March 13, 2024. The stock has severely lagged AI stock, with its counterpart, C3.ai Inc. NYSE: AI, forming a strong price gap and outpacing its most recent earnings. Unusually, PATH hasn’t gotten much sympathy momentum from AI’s gap-and-go earnings beat. This leaves investors with 1 out of 2 conclusions.
Either the market knows something and expects PATH to miss its expectations for EPS of 16 cents and $383.6 million in revenue or lower guidance, or the market has overlooked the potential for a strong quarter. In its latest quarter, PATH reported modest earnings as shares fell to a high of $26.53 following its earnings report. If PATH were to follow in AI’s footsteps and beat and grow its numbers, then we can consider adopting a call debit spread.
The daily candlestick chart on PATH illustrates that the gap filling areas at $22.14 and $20.31 have not been broken since the latest earnings report. The daily relative strength index (RSI) is heading for a bounce through the 50 band.
Start the Call Debit Spread Trade.
With earnings to be reported after the bell on March 13, 2024, we can select the deadline of March 15, 2024. Expires in 9 days.
We opt for a one point spread and choose the $24.50/$25.50 call debit spread. Depending on the brokerage platform, you can select the call debit spread in one trade or manually place two trades by going long the $24.50 to $1.44 call and short the $25.50 to $1 call .12 for a net debt of 32 cents.
The credit/debit spread is cheaper than simply purchasing the $24.5 call option alone.
This is much cheaper than simply deciding to take the direction of a $24.50 to $1.44 call. Because it is OTM, there is no intrinsic value, meaning it is worth zero at the current PATH stock price of $23.18. In fact, PATH would have to close above $25.94 at expiration to break even on the trade since it cost us $1.44 to purchase the call option. By playing the call debit spread, we would get a 1 for 2 risk-reward payout at $25.94 instead of breaking even if we simply took the $24.50 long call option.
Potential Call Debit Spread Results
Since the call debit spread expires on March 15, 2024, there is no intrinsic value. The maximum profit is 68 cents x 100 shares or $68 per contract if PATH closes above $25.50 at expiration. The maximum loss is 32 cents x 100 or $32 paid per spread trade. The break-even price is $24.85. We are willing to risk $32 to earn $68 for a 1 for 2 asymmetric risk-reward trade.
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