After the run we witnessed in many cloud computing and data storage stocks following a wave of tech mergers, it was not a big shock to see sellers enter the mix in the form of profit-taking and short selling. Many of these volatile stocks were back on the rise today, so let’s look at how options traders can capitalize on this volatility.
Salesforce.com (CRM)
Salesforce.com Inc. (NYSE: CRM) fell out of favor with the momentum investing gods, in part due to valuations and in part due to investors shying away from anything tied to the cloud. With it being a high-beta stock and one that caries a triple-digit trailing 12-month P/E ratio, it seems where CRM will settle is dependent upon the market and a dozen other factors, including which direction the wind blows.
CRM had a blow-out earnings report that sent shares higher at the end of August, but the stock has dropped almost $20 in less than two weeks. Today, we saw an analyst upgrade from Piper Jaffray to “overweight” from “neutral,” but it stuck with a $115 price target.
With the Dow flirting with 11,000 again, and a much-anticipated jobs report coming Friday, a straddle may be your best bet. CRM traded up to almost $107 this morning and down to almost $102. It has now settled around $105, so the way to play this volatility is with the CRM October 105 straddle, which costs about $6.
We could easily see volatility on Friday push the stock to $99 or $111 (the breakeven on this straddle), and a move even further is not out of the question.
VMware (VMW)
Looking for another volatile stock straddle to play?
VMware, Inc. (NYSE: VMW) has a virtual monopoly in virtualization. The stock’s 52-week range is $37.70 to $89, and after falling for four days, it is currently trading around $77.
The VMW October 75 straddle may be the way to play continuing volatility in VMW this week.
Rackspace Hosting (RAX)
Finally, we have Rackspace Hosting, Inc. (NYSE: RAX). The stock was under $17 in July, but recently hit a high of $26.50. It is now around $24. It has a nose-bleed P/E ratio, but it also has rapid growth and a $2.9 billion market cap, which is still in the range that many investors like for a takeover. Look at the RAX October 24 straddle.
All three of these trades are short-term options strategies. If this Friday ends up being a quiet one, waiting around for another week and hoping for volatility to return is likely a sucker’s game.
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