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A Smarter Way to Speculate on a Bounce From Equifax (EFX) Stock

A little over a month ago, Equifax Inc. (NYSE:EFX) was essentially un-ownable. An inexcusable data breach that exposed the personal information of 143 million consumers sent Equifax stock tumbling to the tune of 35% in just a few days, with some observers opining the worst was yet to come.

A Smarter Way to Speculate on a Bounce From Equifax Stock
Source: Shutterstock

If the worst is indeed yet to come, the masses certainly don’t believe it. EFX stock has since bounced back from its mid-September low of $89.59 to its current price near $109, and the rebound effort looks like it’s getting its second wind. What gives? In short, with the initial shock of the setback wearing off, a few analysts and speculators are suggesting the steep selloff was overdone, deeming Equifax stock a buy after its beatdown.

Maybe they’re right, and the credit bureau will ultimately shrug off the gaffe and move ahead as if it never happened. But then again, maybe that won’t happen. And there’s the rub. EFX stock may be a bargain, but there’s also the possibility that it may not have yet hit its bottom.

What if, however, there was a way make a speculative trade on Equifax stock without taking a huge risk but still setting yourself up for an oversized reward?

There is.

Anything But a Sure Thing

For the record, Mark Hulbert and Agora Financial’s Jonas Elmerraji are just a couple of the pros suggesting that Equifax stock may actually be a worthy long bet here.

There’s reasonable logic to the possibility. Whereas consumers can easily sever their patronage with restaurant chain Chipotle Mexican Grill, Inc. (NYSE:CMG) or shop somewhere else than a habitually offensive store like Abercrombie & Fitch Co. (NYSE:ANF), lenders that rely on Equifax’s information can’t as easily tap another provider like TransUnion (NYSE:TRU) or Experian plc (ADR) (OTCMKTS:EXPGY).

Still, no one can predict the future for Equifax stock with any meaningful degree of certainty. Buy the stock at your own peril.

Or don’t buy the stock. If you’d like to tap into the possible looming rally, buy super-cheap call options instead.

Smart Play on Equifax Stock

For those who aren’t familiar with equity options, here’s a quick explanation. An option is a contract to buy or sell (but not the obligation to do so) 100 shares of XYZ stock at a set price by a certain date. A call option is the right to make such a purchase, while a put option is a right to sell shares. They’re attractive because they’re cheap — much cheaper than it would be to outright buy or sell 100 shares of said stock — and they tend to move considerably faster than an underlying stock does.

They’re not for the faint of heart. That leverage can work both ways, meaning a small rise in a stock may mean a big lift for a call option’s value, but a small pullback in a stock’s value could lead to a huge drop in a call option’s price.

Sometimes, though, it’s worth it. This may be one of those times.

I generally don’t advocate for the use of options, and I especially don’t advocate using them as speculative tools. If you must make a bet on Equifax stock though, here’s a cost-effective solution. You can spend $300 to purchase an Apr 2018 $130 call. If EFX stock snaps back to $140 before mid-April of next year, the call’s value will grow to $1000, netting you a 233% return on your capital. Your maximum loss, conversely, is no more than the $300 investment in the trade.

The Apr 2018 $130 call gives owners the right to purchase 100 shares of EFX stock at a price of $130 before April 20th of next year no matter where Equifax shares are trading at the time. If Equifax stock moves to $140 as described, the value of the call is the difference between your purchase price of $130 and the then-value of $140. That’s $10 x 100 shares, or $1000. You spent $300 to make the trade, so your net gain is $700.

The flip side is, of course, you could lose the whole $300 if EFX stock doesn’t move meaningfully higher than $130 by April 20th. That’s when the option expires. With a risk/reward ratio like this one though (bear in mind Equifax shares could climb well in excess of $140 over the next six months), it’s worth it. You could spend $11,000 on 100 shares now, and sell them for $14,000 later for a profit of $3000. But, you could just as easily see your $11,000 investment in actual shares fall to $9000 — a $2000 loss — with a mere move back to September’s lows. That’s a lot more than the $300 loss you’d have to eat if the call option trade goes sour.

Bottom Line on Equifax Stock

None of this is to suggest the Apr 2018 $130 calls are the best possibility for you. Maybe you’d like to buy more time. Maybe you’d like to risk less, and accept a more muted return. Perhaps you’d like to put more trading capital to work, which could easily be accomplished just by buying more than one call. This is just an example.

The point is, this is one of those rare, all-or-nothing, “funny money” go-for-broke opportunities where options are the less risky and better-suited means of taking a swing. If you’re wrong, it won’t cost you an arm and a leg the way it would if you outright bought shares of the company.

Just don’t forget, unlike owning stocks, the clock is ticking on all call options.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.

Article printed from InvestorPlace Media, https://investorplace.com/2017/10/equifax-inc-efx-stock-smarter-way/.

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