What's the idea?
Dropbox provides software for organizing remote work, which has now become the dominant model in the market. The company will launch a new product, Dash, in the next six months, which could have a positive impact on its results.
The purchase of a combination of shares and stock options gives an investor the opportunity to increase the potential return without an equal increase in the potential risk. We recommend buying CALL options on DBX stock with a strike price of $23 and an expiration date of 17/01/2025. The option will cost around $2.1, while one contract will cost around $200, as options are traded for 100 shares.
About Company
Dropbox (DBX) operates a cloud platform of the same name for organizing remote collaboration, which is designed to reduce the cost of resources not directly related to workflow. The company offers a range of subscriptions depending on the amount of cloud storage and tools provided. Dropbox was founded in 2007 and is headquartered in California, USA.
Why do we like CALL OPTION DBX_IPO.US @23?
Dropbox provides software for organizing remote collaboration, which has become an integral part of the modern world. According to Forbes, 39% of people between the ages of 24 and 35 now work remotely on a permanent basis, and 25% work remotely on a regular basis.
After announcing its Q2 results, the company said it had completed testing of its revolutionary new product, Dash. It is an artificial intelligence-based tool for searching information in cloud storage, and works on the principle of a neural network that can find information interactively.
Dropbox believes that the declared functionality of the service will allow it to make Dash a unique product with no analogues on the market. The company's biggest competitors, such as Microsoft and Google, offer cloud data storage services, but do not have a tool to help you search for information in such storage.
According to Dropbox's management, Dash and its monetisation could be fully launched by the end of 2024 or early 2025, which could increase investor interest in the company in the near future.
We believe that buying long-term CALL options on DBX stock could be an attractive investment opportunity in the current environment.
We recommend buying the stock options with the following parameters:
- Option type: CALL
- Strike: $23
- Expiration Date: 17/01/2025
- Option cost: $2.1
- Target price: $3.80
- Potential yield: 80%
- Breakeven point: $25.
- From current share price to breakeven point: +8.2%
- Maximum possible loss: $200
Why is investing in stock options sometimes more effective than investing in stocks? You don't need to have a lot of capital to start trading stock options. For example, at the current DBX stock price of $23 per share, 100 shares would cost more than $2 310, while buying an option contract would only cost $200.
Moreover, stock options provide significant leverage, i.e. if the stock price rises sharply, an option position would yield a significantly higher return than a similar stock position. For example, a 23% increase in the DBX stock price by the expiration date of 17/01/2025 would result in a 205% increase in the stock option value.
The table below summarizes the yields of various investment strategies using DBX shares and stock options depending on the stock price performance on the expiration date.
In order not to take on too much risk, you can use a strategy of buying shares and options on the same asset at the same time, in a certain proportion. As you can see from the table above, this investment strategy allows an investor to achieve a higher return than by buying only shares, while keeping the risks lower than by buying only options.
How to use the idea
We recommend buying long-term CALL options on DBX stock with a strike price of $23 and an expiration date of 17/01/2025. The option will cost about $2.1, while one contract will cost around $200, as options are traded for 100 shares.
The investor will profit if the underlying asset’s price is above the breakeven point of $25 on the expiration date. The higher the DBX stock price rises above this point, the greater the profit will be. We recommend closing the position when the option price reaches $3.8. In this case, the profit will be more than 90%.
The investor will incur a loss on the option if the DBX stock price falls below the breakeven point by the expiration date. The maximum possible loss, i.e. 100% of the option contract value, will occur if the stock price falls below the strike price, or $23 in our case.
The chart below shows the distribution of profits and losses from the option position depending on the DBX stock price on the expiration date.
If the stock price rises with increased volatility, the options would show significant growth in a shorter period of time before the expiration date.
Important note
Options must be purchased with a limit order. Buying an option contract with a market order can result in extremely unfavorable prices.
This is a speculative investment idea which carries increased risks. Investing in options can provide a 50%, 100%, 200%, and in some cases even higher returns, but also can lead to a complete loss of the amount invested! In cases where volatility is low, profit or loss can vary between 20% and 30%.
A prudent approach to implementing option ideas is to invest a small portion of the portfolio in many such cases. In this way, losses from unsuccessful ideas will be compensated by high returns on successful investments.
Options are an extremely volatile instrument and therefore require more attention in order not to miss favorable entry and exit points.
Key risks
There is a possibility that some negative corporate news could lead to a decline in the DBX stock price. In this case, the CALL options would become devalued. Excessively low volatility in DBX stock may result in the options becoming devalued by the expiration date.