Buy RAX March 32 Calls

by John Jagerson | December 21, 2010 6:03 pm

This article brought to you by LearningMarkets.com[1].

Rackspace Hosting (NYSE: RAX[2]) is a well-run firm that sells data center space and cloud computing resources. I like the stock, and its support at $30 seems pretty solid. It has the potential to trade at $34 or better in the near term. Rackspace has a large outstanding short interest ratio, which means there are a lot of traders betting against the stock. That can be bad and good. If the stock does rally the shorts will get squeezed and have to cover by buying the stock. Sometimes this can accelerate the rally, which is what I am planning on here.

Trade

Buy to open (BTO) RAX March 32 Calls

Target Entry Price

$2.25

Risk/Reward

The total premium is at risk. I think that the stock could move 10% – 12% in the short term, which is likely to translate to an 80% -120% gain in the option if the move happens within the next month. I expect to exit the trade if prices on the stock get far below $30. This is a fairly tight mental stop but I think it is justified in this case.

 

This article is brought to you by LearningMarkets.com[3].

Source URL: https://investorplace.com/2010/12/buy-rax-march-32-calls/

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