Fortinet hit an important area of resistance this week after a 10% gap-up on earnings. A pause here in FTNT stock could give us a chance to participate with a combination of a short put and a bear call spread.
A Rebound For FTNT Stock
FTNT stock markets itself as the global leader in network security and cybersecurity concerns. And, indeed, this company is recognized as a leader in unified threat management systems. Within IBD's Stock Checkup it ranks first with a Composite Rating of 95.
When you look at a chart of FTNT stock, there are a few areas to note. On its most recent earnings report, Fortinet gapped up over 10%, pulled back to a low of 57.10 and then bounced. The low was pretty close to its Dec. 13 high of 56.71. So, this could be an important area of support (1).
The bounce itself saw volume come in lighter (2) as it rallied up to a resistance level (3) just under 65. You can draw a line from this week's high around 63 and see that matches up to highs from July of last year. That's establishing an important area of resistance.
Sometimes gaps in charts give us a pause to participate in the move. A way to take advantage is with a combination of a short put and a bear call spread.
Strategy Works Well For Recovering Trends At Resistance
With FTNT stock gapping above its 200-day moving average line on earnings, the stock is in recovery mode. But a pause does seem imminent so buying at this level isn't as attractive.
Here's the trade:
- Sell to open the FTNT stock June 16 monthly 55 puts, currently priced around 2.60 on Friday.
Then add a bear call spread:
- Sell to open the FTNT stock June 16 monthly 65 calls, currently priced around 3.90 on Friday.
- Buy to open the FTNT stock June 16 monthly 70 calls, currently priced around 2.20 on Friday.
The bear call spread brings in an extra 1.70 that gets added to the 2.60 from the short put for a total of 4.30 in premium collected.
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Possible Scenarios For Semiconductor Stock Trade
What could happen:
- FTNT stock begins to chop around and does not rise above 65 but does not fall below 55 before expiration. The outcome here would be the full profit of the amount of $4.33 we collected.
- The stock falls below 55 at expiration and we are put the stock with the discount of our premium collected. Instead of a cost basis at 55, we get a reduced cost of 50.70. For this high company that appears to have a lot of runway and upward motion, this choice seems ideal to me. From here, we set reasonable support and loss parameters based on our reduced cost for FTNT stock.
- What if FTNT stock has a strong move? If Fortinet finishes above our long call at 70 at expiration we'll take the full loss of 3.30 on the bear call spread. But that's offset by the 2.60 premium we keep for our short put. In this worst case scenario, our total loss is 70 cents per share or $70 for a block of 100 shares. Not too bad for a worst-case scenario.
It's important to 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.
