by John Kmiecik | January 16, 2014 9:05 am
The 2014 trading year is off to a rather volatile start. Just when you thought the market was looking a little tentative and weak, it comes roaring back. Here is a trade idea using options on Autodesk (ADSK) that may be able to smooth out some of the market jolts and still make money on a bullish stock.
The trade: Buy the ADSK April 50 calls and simultaneously sell the Feb 55 calls for a net debit of $4.40 or better.
The strategy: A diagonal spread involves buying one option and selling another option with a different strike and different expiration. It is essentially a time spread or a calendar spread with different long and short strikes. The goal for this strategy is for the stock to trend slowly up and eventually help pay for some of the long-term call’s premium with the short-term call’s premium received. It is somewhat similar to a covered call, but instead of owning the stock, a long-term call is purchased instead. A perfect-case scenario is for the stock to be slowly moving higher and be trading right at the short call’s strike at expiration. The most that can be lost is what was paid for the spread.
The rationale: Autodesk designs and services software all over the globe. The value of ADSK stock continues to grow, partially fueled by the completion of its acquisition of Circuits.io, and ADSK currently is trading right around its all-time high. Autodesk plans to use this acquisition as a way to expand its offering of technology for electronic circuit design and simulation. ADSK has sparkled and has beat estimates in its past two earnings reports, and each time the stock moved higher after the announcement.
Autodesk also is generally regarded well by analysts with most of them having either a “buy” or “hold” recommendation on the stock.
Click to Enlarge Taking a look at the charts, ADSK stock has been in a relatively smooth uptrend for the past six months, moving from about $36 to where it is currently trading. With potential sideways action ahead for the overall market, ADSK stock might continue to slowly climb — albeit with a few pullbacks mixed in — over the next month.
This diagonal trade idea may limit upside gains because of the sold strike, but it also lowers the cost of the long call position. If ADSK does move past the sold strike early on, the call can be bought back and a higher-strike call can be sold against the long call position. This process can be duplicated for March, which will continue to help defray the cost of the trade and allow the position to possibly profit even more.
Autodesk earnings are expected to be announced Feb. 27, which is after February options expiration.
As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities. Get a free trial of John’s live options trading room here.
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