This Datadog Deal Could Set Up a Triple-Digit Gain
Trade summary: A bull call spread in Datadog, Inc. (Nasdaq: DDOG) using the October $105 call option which can be bought for about $4.70 and the October $110 call could be sold for about $3.15. This trade would cost $1.55 to open, or $155 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 $155. The maximum gain is $345 per contract. That is a potential gain of about 122% based on the amount risked in the trade.
Now, let’s look at the details.
Business Wire reported that Datadog will be available as a first class service within the Azure Portal, enabling customers to accelerate their cloud journey.
Datadog provides monitoring and analytics platform for developers, information technology (IT) operations teams and business users in the cloud age. Its Software-as-a-Service (SaaS) platform integrates and automates infrastructure monitoring, application performance monitoring and log management to provide real-time observability of its customers’ entire technology stack.
Datadog is used by organizations of all sizes and across a range of industries to enable digital transformation and cloud migration, drive collaboration among development, operations and business teams, understand user behavior and track key business metrics.
The company’s platform provides visibility and insights into IT infrastructure, application performance and the real time events. Its platform is employed across public cloud, private cloud, on-premise and multi-cloud hybrid environments.
Business Wire continued, “As part of this launch, Datadog will now be available in the Azure console as a first class service. This means that Azure customers will be able to implement Datadog as a monitoring solution for their cloud workloads through new streamlined workflows that cover everything from procurement to configuration.
The improved onboarding experience makes Datadog setup automatic, so new users can start monitoring the health and performance of their applications with Datadog quickly, whether they are based entirely in Azure or spread across hybrid or multi-cloud environments. With the deepest integration and the easiest configuration, Datadog is now clearly positioned as the premier monitoring solution for Azure.
In addition to the integration enhancements, the new channel through the Azure Marketplace allows customers to draw down on their committed Azure spend to purchase Datadog. This makes it significantly easier for customers to find budget, and also aligns incentives for Azure and Datadog sales teams for better collaboration and engagement in co-sell motions with enterprise clients.
As a result, this partnership will enable more Azure customers to leverage Datadog’s observability platform to drive successful cloud modernization and migration initiatives.
Datadog’s native presence represents a first-of-its-kind integration of a third-party service into Azure.
“Azure is the first cloud to enable a seamless configuration and management experience for customers to use partner solutions like Datadog. Together with Datadog, we are enabling customers to use this experience to monitor their Azure workloads and enable an accelerated transition to the cloud,” said Corey Sanders, Microsoft Corporate Vice President, Azure.
“Observability is a key capability for any successful cloud migration. Through our new partnership with Microsoft Azure, customers will now have access to the Datadog platform directly in the Azure console, enabling them to migrate, optimize and secure new and migrated workloads,” said Amit Agarwal, Chief Product Officer, Datadog.”
The stock is near resistance and potentially positioned for a breakout.
The weekly chart shows all trading history and reinforces the image of the stock challenging resistance.
A Specific Trade for DDOG
For DDOG, the October 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 October $105 call option can be bought for about $4.70 and the October $110 call could be sold for about $3.15. This trade would cost $1.55 to open, or $155 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 $155.
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 DDOG, the maximum gain is $345 ($110- $105= $5; 5- $1.55 = $3.45). This represents $345 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $155 to open this trade.
That is a potential gain of about 122% 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 DDOG 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 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.