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This IPO Could Have Upside For Traders

This IPO Could Have Upside For Traders

IPOs can deliver large gains when they begin trading. They can also move after they start trading. One stock that could move soon, as Silicon Valley Business Journal reported, is the shares of newly public, CrowdStrike Holdings (Nasdaq: CRWD).

The stock moved “after a handful of influential Wall Street analysts-initiated coverage of the company with generally positive notes to investors.”

CRWD daily chart width=

The company is expected to publish its first quarterly earnings report this month.

CrowdStrike went public in mid-June at $34 per share and popped 70 percent in its market debut. Wall Street currently values the company at $13.3 billion — within striking distance of its older, larger and more profitable cyber security rival Symantec Corp.

CRWD weekly chart

Analyst comments included:

“We believe CrowdStrike’s innovative technology which layers on [artificial intelligence/machine learning] to crowdsourced threat intelligence to stay ahead of the adversaries is superior to its competitors.” Oppenheimer analyst Shaul Eyal wrote, according to Business Insider.

“Our belief is CrowdStrike to displace and replace competitors’ solutions, and to take market shares from legacy and next-gen antivirus vendors.”

Oppenheimer set a $90-per-share price target on CrowdStrike shares.

J.P. Morgan initiated coverage of the stock with a “buy” rating, with analysts there saying they expected the stock to reach $100 per share by the end of 2020.

Bank of America analyst Tal Liani said CrowdStrike could “disrupt” the $7 billion endpoint cybersecurity market, placing a $75 price target on the stock.

Analysts from Needham & Company, RBC Capital Markets, Barclays and SunTrust Robinson Humphrey also initiated coverage today, with targets ranging from $69 to $80 per share.

CrowdStrike launched in 2011 and raised more than $480 million in funding before going public. The company pulled in $118.8 million in sales in fiscal 2018, but failed to turn a profit, burning through $135.5 million in cash that year.

“We expect to continue to incur net losses for the foreseeable future as we continue to invest in our business, and our sales capabilities in particular, to address our large market opportunity,” CrowdStrike wrote in its IPO prospectus.

The analyst reports could create buying interest in the stock,

 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.

bull call spread

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.

A Specific Trade for CRWD

Every day, we scan the markets looking for trades with low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.

When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.

For CRWD, the August 16 options allow a trader to gain exposure to the stock.

An August 16 $75 call option can be bought for about $5.60 and the August 16 $80 call could be sold for about $4. This trade would cost $1.60 to open, or $160 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 $160.

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 $3.40 ($80 – $75= $5; $5 – $1.60 = $3.40). This represents $340 per contract since each contract covers 100 shares.

Most brokers will require minimum trading capital equal to the risk on the trade, or $160 to open this trade.

That is a potential gain of about 112% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.