Aristia Networks is showing strong relative strength and is sitting in IBD Leaderboard.
According to the IBD Stock Checkup, ANET stock is ranked No. 2 in its industry group and has a Composite Rating of 98, and EPS Rating of 98 and a Relative Strength Rating of 92.
By using a combination of option strategies, we could potentially buy the stock for a significant discount or achieve a healthy profit if the stock trades sideways.
Here's the trade:
Sell to open the ANET Aug. 18 put with a strike price of 155, which was trading around $2.50 Wednesday.
Then, add a bear call spread:
Sell to open the ANET Aug. 18 call with a strike price of 195, which was trading around $3.45 Wednesday.
Buy to open the ANET Aug. 18 call with a strike price of 200, which was trading around $2.50.
The sold put brings in around $250 in option premium, and the bear call spread adds another $95 in premium. In total, the combination of the two trades generates $345 in premium.
The position starts with a delta of 13, meaning it is roughly equivalent to owing 13 shares of ANET stock. This figure will change as the trade progresses.
Possible Scenarios For ANET Stock Option Trade
Let's work through a couple of scenarios of how this trade could look at expiration on Aug. 18.
- If ANET trades sideways and finishes between 155 and 195, the sold put and bear call spread will both expire worthless. The total profit will be equal to the premium received of $345.
- If ANET falls below 155 at expiration, we will be assigned on the sold put and will be forced to buy 100 shares at 155. However, our net cost basis will be 151.55, thanks to the $345 in option premium received. That is 14% below Wednesday's closing price.
- If ANET rallies above 205, the bear call spread will suffer a full loss of $500. But this will be mostly offset by the $345 premium received, leaving the trade with a smaller loss of $155.
Arista Networks is due to report earnings on July 31, so this trade would have exposure to earnings if held through that date.
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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
