Salesforce is due to report earnings on Thursday after the closing bell, and the options market is pricing in a 5.5% move in either direction. So, let's consider a bull put spread trade in CRM stock.
Such an option trade fits the view that 1) we think CRM stock will stay within the expected range; and 2) the response to the earnings report is likely to be positive.
CRM stock has stayed above the lower expected range following five of the past six earnings announcements. Plus, taking the at-the-money put and call for the Dec. 1 expiration, we can see that the expected range is 5.5%.
Now that we know the expected range, let's find a bull put spread that has the short strike roughly 5.5% below the stock price.
CRM Stock Today: The Setup
Selling the Dec. 1-expiring 210-strike put option and buying the 205 put would create a bull put spread. This spread was trading for around $75 per set of contracts, based on recent action. That means a trader selling this spread would receive $75 in option premium and would bear a maximum risk of $425.
That represents a 17.6% return on risk between now and Dec. 1 if CRM stock remains above 210.
If CRM closes below 205 on the expiration date, the trade loses the full $425.
The break-even point for the bull put spread is 209.25, calculated by taking 210 less the 0.75 option premium per contract.
There is little room for adjustment with short-term trades such as this held over earnings.
A 17% return in a few days would be nice, but the possibility of losing 100% is also very real. As such, this style of trade is only for traders with a high-risk tolerance.
Plan B: Selling A Covered Call?
If CRM stocks ends below 205, long-term investors could consider taking ownership of the 100 shares and selling covered calls against it.
According to IBD Stock Checkup, CRM stock ranks 15th in its group and has a Composite Rating of 95, an EPS Rating of 98 and a Relative Strength Rating of 91.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
