A New Product Could Help Traders Capture More Than 90%
Trade summary: A bull call spread in Fastly, Inc. (NYSE: FSLY) using the August $90 call option which can be bought for about $13.80 and the August $95 call could be sold for about $11.20. This trade would cost $2.60 to open, or $260 since each contract covers 100 shares of stock.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $2.60. The maximum gain is $240 per contract. That is a potential gain of about 92% based on the amount risked in the trade.
Now, let’s look at the details.
FSLY has been a strong performer since breaking out in May.
Business Wire reported that FSLY, a provider of a global edge cloud platform, [recently announced the extension of its platform’s observability features to its [email protected] serverless compute environment.
These advancements include customizable logging, real-time and historical metrics, and newly-launched tracing, giving developers newfound transparency into what happens after code is deployed within a serverless architecture and unlocking mission-critical visibility needed to find and fix operational issues fast.
Fastly’s [email protected] helps companies build applications and execute code on its globally distributed infrastructure, at the edge of the internet, without any of the maintenance or headache of managing it directly.
“At Fastly, we think observability should go beyond logging and monitoring to also provide the context and data needed to answer crucial questions about serverless performance and, ultimately, an end user’s experience,” said Tyler McMullen, CTO of Fastly.
“In addition to concerns about cold start times, observability has been a top apprehension with serverless among developers. With [email protected], we solved for the first concern with a 100x faster startup time than any other solution in the market. Now, we’re excited to solve the second by giving customers layers of observability critical for data-driven decision making and understanding core system performance.”
[email protected] accomplishes this level of observability by providing developers with:
- Customizable Logging: Developers can send real-time logs to 27 supported endpoints and counting. Developers have access to automatically-exposed default log fields, and can also capture custom event details that meet their business needs. Having access to log data helps developers determine the root cause of a host of potential issues, from infrastructure to end-user.
- Real-time and Historical Metrics: [email protected] surfaces rich metrics, such as CPU and RAM utilization, and lets developers explore that data as it happens, or in historical analysis. This increased visibility allows developers to better monitor application performance and react in real time to keep a site online, which can support revenue and a better end-user experience.
- End-to-End Request Visibility: [email protected] honors request tracing parameters by maintaining them when they enter and leave the Fastly platform. Developers can tag individual end-user requests with unique identifiers, helping illuminate any blind spots in multi-technology infrastructures and providing details on the request’s lifetime. Users can pass this information along to third-party systems like Datadog that help with data visualization, and to conduct further, tailored analysis.
“Serverless architecture has changed the game for operationalizing and managing product workloads,” said Ilan Rabinovitch, Vice President, Product & Community at Datadog, a monitoring and security platform for cloud applications, and a Fastly integration partner for data storage and analysis.
The stock does not look extended after completing about one year of trading.
A Specific Trade for FSLY
For FSLY, the August options allow a trader to gain exposure to the stock. This trade will be open for about six weeks and allows for traders to turn over capital quickly, potentially compounding gains several times a year.
An August $90 call option can be bought for about $13.80 and the August $95 call could be sold for about $11.20. This trade would cost $2.60 to open, or $260 since each contract covers 100 shares of stock.
The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $260.
The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.
For this trade in FSLY, the maximum gain is $240 ($95- $90= $5; 5- $2.60 = $2.40). This represents $240 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $260 to open this trade.
That is a potential gain of about 92% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.
A Trade for Short Term Bulls
As with the ownership of any stock, buying FSLY could require a significant amount of capital and exposes the investor to standard risks of owning a stock.
To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.
Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.
To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.
This strategy is designed to profit from a gain in the underlying stock’s price but the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.
Source: The Options Industry Council
Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.
This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.