Market Overview
Coming out of expiration last Friday we are holding stock positions in Las Vegas Sands (LVS) and DraftKings (DKNG). Today we are going to sell new calls to continue to lower our cost basis. Here are those trades (and approximate prices):
LVS – Sell the July 60 Call (exp. 7/21) for $1.75
DKNG – Sell the July 25 Call (exp. 7/21) for $1
Moving on …
The good times for the bulls continued as the S&P 500 rose for a fifth consecutive week, its longest such streak since November 2021, and it was also the best week for the S&P 500 since March.
And while the S&P 500 gained 2.6% on the week, it was once again the Nasdaq that led the charge as the tech-heavy index gained 3.25%, while the Dow rose 1.25%.
This week we are adding a volatile stock that has been on a big run … though we are doing so defensively.
The Stock – Unity Software (U)
Why the Strength
Apple says it is using Unity’s development tools on its new Vision Pro headset, adding momentum on top of strong earnings and outlook for the business. Unity is a platform used by video game makers to create games and utilized by industrial designers to improve factories and products.
In what’s been a soft period for the game industry, Unity beat expectations for the first quarter, posting $500 million in revenue, a 56% jump, and $32 million in EBITDA, which was well above its guidance of around $10 million and up from a big loss a year ago. The performance showed that Unity has real pricing power, with the company able to push through recent rate hikes with no effect on its customer base.
AI promises to make the company’s Create platform easier for programmers to use to build video games as well as ensure that nuances of gameplay result in unique renderings that may never appear again, based on the exact timing when players press a button. Like ChatGPT, AI will also provide for non-player characters that interact in the games more like real people.
On the industrial side, for what Unity calls its Grow, AI will improve its digital twins, tech-based models of real-life machinery which companies use for predictive maintenance and process improvements—importantly, the digital twin side of the business can potentially be much larger than game design.
Right now, the company is projecting Q2 will see sales of around $515 million, which would be up about 74% from 2022 with profitability up roughly 50%. For 2023, revenue of $2.1 billion is projected. Much of the year-on-year gains are from acquisitions, but the core business is still growing at solid double-digit rates.
Technical Analysis
Apple’s disclosure that it’s using Unity at its early-June developer conference rocketed shares on massive volume through multiple points of resistance around the 200-day line. This came after months of super-volatile bottoming action from last November, too, which provides a firmer foundation for the move. Stop — 32.5
The Covered Call Trade
Buy Unity Software (U) Stock at 39.5, Sell to Open July 35 Strike Calls (exp. 7/21) for $5.50, or a Net Price of 34 or less
Static Return: $100 per covered call (2.94%)
Breakeven: 34
Covered Call Return (if assigned): $100 per covered call (2.94%)
Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.
However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 34 or less. (In this case 39.5 minus 5.50 = 34. Or another example is you could pay 40 for the stock and sell the call for 6, which also equals 34)
For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …
Open Positions
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.
The next Cabot Profit Booster issue will be published on June 27, 2023.
