Two reasons would make me deploy a simple covered call strategy. The first is to act on a short-term trading opportunity while enabling some downside protection. The second is to establish what I hope will be a longer-term position in well-run company at lower entry points. In this case, I'll do those, and make some bread, I hope, with Toast.
Yes, I'm talking about Toast Inc. (TOST) , the Boston-based company that's become a best of breed name in a growing niche market. The company provides a cloud-connected operating system specifically geared toward the restaurant business. Its platform is used in some 85,000 locations -- nearly all in the U.S. -- and processed some $101 billion in gross payment volume over the past year.
Toast's platform connects the front-of-the house with back-of the house operations across dine-in, takeout, and delivery channels through a comprehensive suite of software-as-a-service products and financial technology services. This menu includes reservations management, customer ordering, inventory management, payroll, accounting, or payments processing. If you have friends that work in the hospitality industry, you will find out quickly how highly they think about the platform's capabilities.
The company generates revenue through four sources: subscription services; financial technology services; hardware; and professional services. Debuting late summer of 2021, Toast's stock quickly shot up to nearly $70 a share. But the prices fell as the Fed started its monetary tightening regime in the first quarter of 2022; the stock was trading in the low teens by the summer of last year.
Toast is moving toward profitability with nearly 40% revenue growth projected for fiscal 2023 following by sales growth in the high 20s in fiscal 2024. The company is also expanding into other countries like the U.K. and Canada. It certainly has the balance sheet to get to the point of producing positive cash flow with nearly $1 billion of cash and marketable securities on its balance sheet and no debt. Valuation is under three times annual revenues before taking net cash into consideration.
Toast appears poised to continue to capture even greater market share with arguably the best restaurant POS and management platform in the industry. And from a technical standpoint, its stock has formed a solid base in the high-teens, suggesting limited downside risk. This can be mitigated further via a simple covered call strategy. In addition, liquidity against this equity is extremely solid and the option premiums are quite lucrative.
To establish an initial position in TOST using a covered call strategy, do the following. Selecting the January $20 call strikes, fashion a covered call order with a net debit in the $16.60 to $16.70 a share range (net stock price - option premium). This strategy provides downside protection of approximately just over 20%. This strategy also has nearly 20% potential upside even if stock drifts down a little over the option duration.