This software stock is about to face major resistance. How to trade options
I believe Salesforce stock is approaching resistance and have a winning options trade if the stock falls. Salesforce (CRM) fell a shocking 22% despite beating earnings estimates in its most recent earnings report on May 29. As is often the case with growth stocks trading at high valuations, the earnings beat is important, but even more important is the forward guidance. In CRM’s case, the forward guidance was poor and growth in the current quarter was weaker than expected, leading to the big drop. However, tech stocks have generally been on a strong run over the past 9 months, and CRM has benefited from that, recovering most of its post-earnings losses over the past 30 days. This trade is based on the well-known principles of support/resistance and gap-filling. Technical analysts know that gaps, such as the post-earnings gap seen in CRM, tend to fill over time. Additionally, the point at which a gap is filled tends to become an area of significant support or resistance. For CRM, we are currently looking at resistance around $267. With the bearish bias, the trade structure I am using is called a call spread, also known as a call credit spread. The Trade To construct my trade, I am selling a $265 call that coincides with the resistance level that fills the bullish gap and buying a $270 call as a single unit. As long as CRM does not move above $265 by my expiration date, this trade will yield a 30% ROI in 18 short days. Here is my exact trade setup: Sell $270 call, expiry July 26 Buy $265 call, expiry July 26 Credit: The $150 credit spread is a high probability trade, however it is worth noting. Winners typically result in small profits that compound over time, while losers result in larger losses. With an effective risk management strategy, these trades can be very profitable over time. -Nishant Pant Founder: https://tradingextremes.com Author: Mean Reversion Trading Youtube, Twitter: @TheMeanTrader DISCLOSURE: (None) All opinions expressed by CNBC Pro contributors are solely their own and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent companies or their affiliates and may have been previously disseminated by them on television, radio, the internet or other media. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY. THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND IS NOT INTENDED TO BE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO PURCHASE ANY SECURITIES OR OTHER FINANCIAL ASSETS. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE CONTENT MAY NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISION, YOU SHOULD CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here to view full disclaimer.
