Arista Networks has been on a monster run in the last few months and it could be time to trim some exposure. Investors holding a position in ANET stock could maintain bullish exposure with much lower risk by selling their shares and buying a bull call spread. Here's how the bull call spread works.
ANET recently cleared a base around 300 and after a pullback to its 10-week moving average it launched powerfully. Since we have an extended market, the bull call spread keeps bullish exposure but limits the risk. Plus with a September expiration, it gives the trade time to work.
Arista Networks provides cloud networking solutions for data centers and cloud computing environments. According to IBD Stock Checkup, ANET stock is ranked No. 1 in its industry group and has a Composite Rating of 98, an EPS Rating of 98 and a Relative Strength Rating of 97.
ANET Stock Strategy: The Bull Call Spread
A bull call spread starts with buying a call and then selling a further out-of-the-money call.
Selling the further out-of-the-money call reduces the cost of the trade but also limits the upside.
Going out to the September expiration, a 390-strike call option traded around 20.50 this morning, and the 400 call was around 17.10.
Buying the 390 call and selling the 400 call creates a bull call spread. The trade cost would be $340 (difference in the option prices multiplied by 100), and the maximum potential profit is $660 (difference in strike prices, multiplied by 100 less the premium paid).
Risk Vs. Reward
A bull call spread is a risk-defined strategy. If ANET stock closes below 390 on Sept. 20, the most the trade loses is the roughly $340 premium paid.
Potential gains are also capped above 400. No matter how high ANET stock goes, the most the trade profits is $660.
The breakeven price for the trade is equal to the long call strike plus the premium, which in this case would equal 393.40.
In terms of trade management, if the stock dropped below 345, I would consider closing early for a loss.
Arista Networks is due to report earnings in late July, so this trade has earnings risk if held through then.
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 setup is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
