Splunk Inc (NASDAQ:SPLK) is in the business of providing enterprise Big Data management tools for its corporate clients. Specifically, Splunk’s ‘machine data engine’ and Splunk Cloud service assist businesses in tracking and accessing massive quantities of information within their networks.
On Friday and chiming in on top of Thursday’s upbeat ‘Overweight’ reiteration nod and 2-point price target lift to $82 in SPLK stock from Pac Crest analysts, DA Davidson initiated coverage of SPLK stock with a “buy” recommendation.
With fresh broker support in place, Splunk stock and SPLK options are also providing some ‘big data’ of sorts that point to an in-the-money bull call spread as worth plunking down a position on.
SPLK Weekly Trading Chart
Shown above is a weekly trading chart of Splunk stock. Following a strong 2013 after its 2012 IPO, shares of SPLK soured with investors in the first two quarters of 2014. The technical haircut resulted in roughly a 60% decline in SPLK shares from its highs.
After hitting its low mark $39.35 in early June, SPLK has put together an uptrend over the past 10-plus months. The bullish movement off the lows added about 90% in shareholder value at recent highs of nearly $75 in SPLK stock.
A gain of 90% thereabouts is nothing to sneeze at. But as we can see on the chart, rather than investors looking like they’re on Cloud 9 and out of control in a parabolic, sky-high buying binge, the rise in shares of SPLK has been a fairly steady and methodical increase. The uptrend is also one that’s still about 70% removed from its early 2014 highs.
The other “big data” to focus on within the SPLK chart is the past several trading weeks. Currently, Splunk stock is offering a pullback/support entry in shares after a successful hold of 200-day simple moving average support (not shown).
For bullish SPLK investors, there’s also a golden cross (50-/200-day simple moving average alignment) in place. Additionally, the SPLK chart also shows a second, parallel channel line as stochastics are on the verge of crossing over in concert with the higher low of SPLK shares.
The interpretation of the second channel line is the break of trend support at the initial up-channel likely acted as a technical purge. Meanwhile, SPLK has managed to hold its symmetry with fewer eyeballs, investor attention and move higher within what we’ll call an improved uptrend.
SPLK Volatility
Looking to SPLK’s trading chart once again, the last big data available to traders are the implied (blue line) and underlying volatility (brown line) pricing are at lows for the last 16 months. Volatility levels were lower during 2013’s uptrend, but are sufficiently cheap historically to consider an outright long call.
Rather than buying a call however, I prefer approaching Splunk stock more conservatively. After checking the SPLK options board, a slightly in-the-money bull call spread looks attractive as a way to position within the trend.
SPLK Bull Call Spread
Specifically, the SPLK May $60/$62.50 bull call spread for $1.50 is the vertical of most interest to us. This particular vertical, because of its position relative to SPLK shares, expands towards its maximum width if Splunk stock simply remains at this level until May expiration.
This is attributed to the sold SPLK May $62.50 call being comprised of all time premium, while the purchased May $60 call is mostly intrinsic or stock value. Because of this relationship, this type vertical is a bit like a buy-write in that the trader collects premium.
Were SPLK stock to sit, the spread would increase in value to $2.41 based on SPLK shares at $62.41. Mind you, that’s only pennies from reaching its maximum spread value of $2.50 and profit of $1 if the stock were at or above $62.50 when the contract expires May 15.
What’s more, with a breakeven of $61.50 this vertical allows SPLK to drop by about 1.5% at expiration before the spread is in jeopardy of doing worse than breaking even. Conversely and unlike the buy-write, the SPLK vertical position affords concrete downside protection.
While Splunk’s earnings will be announced after the May expiration cycle, competitor Tableau Software Inc (NASDAQ:DATA) is reporting on May 7. With the always real threat of an undesired sympathy move or simply some other market, chart-wrecking event wreaking havoc; this bull call spread in SPLK stock makes additional sense and in our opinion, is ‘big data’ to consider.
As of this writing, investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon his observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual.
