Salesforce.com, Inc. (NYSE:CRM) has been on quite a run lately, with the stock up 17% since the beginning of the year. Yet even given the torrid rally, large repeat call buying continues in CRM stock.
Salesforce also is poised at a critical technical breakout level and has been the topic of takeover talk in the past. Given all that, now might be the time to follow along with the big call buying and take a bullish position in Salesforce stock.
As an options analyst, I look to identify situations where unusual option activity is evident. Many times these big option trades are done by “informed” institutional buyers who may have insider-type knowledge. They use calls to gain the potentially enormous leverage that options can provide in addition to their stock positions.
Over the past few weeks, there has been large, repeat call buying in CRM options. Some of the more notable trades are highlighted below:
- 20,000 May 90 calls on Jan. 25
- 25,000 March 85 calls on Jan. 30
- 16,000 May 90 calls on Jan. 31
- 11,839 Apr 90 calls on Feb. 1
These four trades alone account for over 72,000 call contracts, which control over 7.2 million shares of CRM stock. That’s most assuredly not a small stake.
From a technical standpoint, Salesforce is at a critical juncture. As the chart shows, CRM stock is trying to break out past the crucial $80 level, which could lead to a further move to all-time highs in the stock.
Salesforce has has been the subject of takeover chatter in the past. Microsoft Corporation (NASDAQ:MSFT) and Oracle Corporation (NYSE:ORCL) have been potential rumored suitors, though obviously no deal has come to fruition yet.
The enormous call buying has also had a big effect on option prices. Implied volatility (IV), which normally lessens as a stock rises, is now at the highest level over the past three months. Current IV levels of 36% percentile far exceed historic volatility (HV) levels of only the 6% percentile.
With earnings not due out for another couple of weeks, it is highly unlikely the big-time call buying that is centered in April and May options is earnings-related.
Since options prices (IV) are comparatively expensive, option selling strategies are favored. To position bullishly along with the big-time call buyers, selling out-of-the-money puts makes intuitive sense.
How to Trade CRM Stock Here
Sell the CRM May $75 puts at $3.50 to open
Sell one put for each 100 shares of Salesforce stock you would be comfortable owning. The short $75 strike price is 6% below the $80.21 closing price of CRM.
If Salesforce closes above $75 on May 19 expiration, you keep the $350 premium per put sold. If Salesforce closes below $75, you will be assigned the stock and end up buying shares at a net cost of $71.50.
To avoid assignment, close out the trade if CRM stock is below $75 near expiration.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.
