This software stock is about to hit heavy resistance. How to trade it with options
I believe Salesforce shares are about to hit resistance and there’s an options trade that will win if the stock falters. Salesforce (CRM) dropped an eye-popping 22% despite beating earnings estimates in its last earnings report on May 29. As is common with growth stocks, which trade at a high valuation, beating earnings estimates is important, but even more crucial is forward guidance. In the case of CRM, the forward guidance was lackluster, and growth in the current quarter was softer than expected, leading to the massive drop. However, tech stocks as a whole have been on a tear for the last 9 months, and CRM has benefitted from that, recovering most of its post-earnings losses in the last 30 days. This trade relies on the well-known principles of support/resistance and gap fills. It’s common knowledge among technical analysts that gaps, such as the post-earnings gap seen in CRM, often fill over time. Additionally, the point at which a gap fills tends to become a significant support or resistance zone. For CRM, we’re currently observing resistance around the $267 level. With a bearish directional bias in place, the trade structure I am using is called a bear call spread, also known as a call credit spread. The trade To construct my trade, I am selling a $265 call option which happens to coincide with upside gap fill resistance and buy a $270 call option as a single unit. As long as CRM doesn’t go above $265 by my expiration date, this trade will return 30% ROI in 18 short days. Here is my exact trade setup: Sold $270 call, July 26th expiry Bought $265 call, July 26th expiry Credit: $150 Credit spreads are high-probability trades, however here’s a catch. The winners typically bring in small profits that add up over time, while the losers result in larger losses. With an effective risk management strategy, these trades can be very rewarding over time. -Nishant Pant Founder: https://tradingextremes.com Author: Mean Reversion Trading Youtube, Twitter: @TheMeanTrader DISCLOSURES: (None) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
