A Work From Home Trade With Double Digit Potential
Trade summary: A bull call spread in CrowdStrike Holdings, Inc. (Nasdaq: CRWD) using the April 17 $50 call option which can be bought for about $3.70 and the April 17 $55 call could be sold for about $1.70. This trade would cost $2 to open, or $200 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 $200. The maximum gain is $300 per contract. That is a potential gain of about 50% based on the amount risked in the trade.
Now, let’s look at the details.
Millions are now working from home and the trend has highlighted unexpected investment opportunities. Companies that provide the tools for meetings are productivity are on many traders minds. However, security is also important to consider.
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A recent earnings report highlights that as Market Watch noted,
“CrowdStrike Holdings Inc.’s stock soared Friday after the cybersecurity company demonstrated in its quarterly results and outlook that it’s well-positioned for the new realities of a work-from-home world still reeling from the spread of COVID-19.”
The stock was up on the news.
CrowdStrike provides cloud-delivered solution for the endpoint protection. The Company’s Falcon platform is comprised of two integrated technologies: lightweight agent and threat graph.
The platform offers a set of cloud-delivered technologies that provides a wide range of products including antivirus, endpoint detection and response (EDR), device control, managed threat hunting, information technology (IT) hygiene, vulnerability management and threat intelligence.
Its cloud modules include Falcon Prevent, Falcon Insight, Falcon Device Control, Falcon OverWatch, Falcon Discover, Falcon Complete, Falcon Spotlight, Falcon X, Falcon Search engine and Falcon Sandbox.
Its Falcon Prevent provides antivirus capabilities to customers, delivering protection to defend customers against both malware and fileless attacks.
Its Falcon Complete provides monitoring, management, response and remediation solution to its customers.
MarketWatch continued, “Of the 21 analysts who cover CrowdStrike, 16 have overweight or buy ratings, four have hold ratings, and one has a sell rating.
Six analysts hiked their price targets while three cut theirs, resulting in an average price target of $73.15, up from a previous $72.35, according to FactSet data.
JPMorgan analyst Sterling Auty, who has an overweight rating and Wall Street’s most bullish price target on the stock of $109, said CrowdStrike is benefiting from a “couple of significant advantages” right now.
“First, the largest installed base of endpoint security in the corporate world belongs to Symantec and post its acquisition, customers and channel partners are driving significant share shift over to CRWD as the leading technology provider,” Auty said.
On the analyst call late Thursday, CrowdStrike co-founder and Chief Executive George Kurtz confirmed that the company has taken share from Symantec’s enterprise security business following its recent acquisition by Broadcom Inc.
“Second, the architecture of its solutions being cloud first with the ability to implement without the need for a host (laptop, server, virtual cloud server, etc.) or needing to reboot is key given the need to implement these solutions remotely,” Auty said. “Third, cybersecurity spending is resilient even in tough economic times as bad actors look to exploit any situation that they can.”
Jefferies analyst Brent Thill, who has a hold rating and a $55 price target, said CrowdStrike return on investment “as a security cloud becomes even more evident with customers shifting toward a more distributed and remote workforce.”
“Cybersecurity remains mission critical for business, particularly as they look to protect endpoints and workloads in a more distributed remote workforce,” Thill said. “CRWD has not seen any operational disruptions as 70% of its workforce already worked remotely.”
Stifel analyst Gur Talpaz, who has a buy rating and a $90 price target, remarked on how upbeat the analyst call was given the wealth of dreary news as of late.
“Listening to CrowdStrike’s Q4 earnings call, you’d be hard-pressed to believe that we were in the midst of a global pandemic that has already left its mark on multiple industries and the broader economy,” Talpaz said.
“CrowdStrike has always run a distributed organization with both company leadership and employees dispersed across the globe,” Talpaz said. “We believe this has served the company well but, more importantly, means they are well-equipped to handle the potential challenges that come from a broader remote workforce.”
The weekly chart shows the stock began trading last year and the recent plunge pushed below support. The stock could now be attractive to investors who have avoided the stock until it broke below the IPO price.
A Specific Trade for CRWD
For CRWD, the April 17 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 April 17 $50 call option can be bought for about $3.70 and the April 17 $55 call could be sold for about $1.70. This trade would cost $2 to open, or $200 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 $200.
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 CRWD the maximum gain is $300 ($55- $50= $5; $5 – $2.00 = $3). This represents $300 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $200 to open this trade.
That is a potential gain of about 50% 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 CRWD 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 has 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.