Rackspace Technology is a multi-cloud services company that just completed its Initial Public Offering earlier this month on August 5th. It is uniquely positioned as a primarily pure-play company in managed multicloud services with 120,000 customers, 40 data centers, and 2,500 cloud-certified professionals worldwide. Rackspace is a Gartner 2020 Magic Quadrant "Leader" for Public Cloud Infrastructure and Managed Services. Impressively, Gartner calls Rackspace "uniquely positioned as a next-generation GSI (Global Systems Integrator)" providing services beyond those of the six hyperscale cloud providers.
Revenue is forecasted to grow at an approximate 14% cagr over the next five years.
Its first public earnings report will be this afternoon after the market closes. Normally, the Covered Calls Advisor avoids positions with intervening earnings reports, but the exceptionally high return-on-investment possibility (the implied volatility of the Puts was 104.8 when this positions was transacted) along with eight analysts initiating coverage this morning at an average target price of $28 provides an attractive risk/reward investment opportunity. Because of the high risk associated with the earnings report after the market close today, the Covered Calls Advisor decided to establish a small but also deep-out-of-the-money (i.e. strike price below the current stock price) initial Cash-Secured Puts position this morning. So the $346.65 ($.70 per share x 500 shares - $3.35 commission) is a nice premium to receive for these out-of-the-money Put options.
As detailed below, for this new Rackspace Technology Inc. Cash-Secured Puts position there is potential for a +4.1% absolute return in 19 days (equivalent to a +79.2% annualized return-on-investment).
Rackspace Technology Inc. (RXT) -- New 100% Cash-Secured Puts Position
The transaction today was as follows:
The Covered Calls Advisor does not use margin, so the detailed information on this position and the potential result detailed below reflect that this position was established using 100% cash securitization for the five Put options sold.
A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $8,403.35
= ($17.50 - $.70) * 500 shares + $3.35 commission
Net Profit:
(a) Options Income: +$346.65
= ($.70 * 500 shares) - $3.35 commission
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If Rackspace is above $17.50 strike price at the September 18th expiration): +$0.00
= ($17.50 - $17.50) * 500 shares
Total Net Profit (If Rackspace stock price is above $17.50 strike price at options expiration): +$346.65
= (+$346.65 options income +$0.00 dividend income +$0.00 capital appreciation)
Absolute Return (If RXT stock is above $17.50 strike price at the Sept 18th options expiration) : +4.1%
= +$346.65/$8,403.35
Annualized Return: +79.2%
= (+$346.65/$8,403.35)*(365/19 days)
The downside 'breakeven price' at expiration is at $16.80 ($17.50 - $.70), which is 18.8% below the current market price of $20.69.
