Palo Alto Networks Inc (PANW) Stock Is a Falling Machete. Catch It!

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Palo Alto Networks Inc (NYSE:PANW) reported earnings on Tuesday evening, and the stock market is reacting violently Wednesday morning to the news. PANW stock is down 20% today, and while I’m usually not one to risk my fingers trying to catch falling knives, I find myself interested in today’s action.

Besides, using the options markets, I can structure a trade that would allow me to start long with room for error.

Yes, Palo Alto Networks’ revenues missed, but fundamentally — very, very broadly fundamentally — not much has changed. As the world becomes more digitally dependent, it will need cyber security more than ever. PANW is a major provider, so it’s a matter of going back to better execution on its management plans.

Usually, investors will give a company a few passes on bad earnings. Unless specifically stated, the assumption is that it was a temporary bad situation that caused the quarter’s disappointment.

PANW stock is no stranger to bad earnings reactions — previous drops were entry opportunities that rewarded those who stepped in on red days.

Today’s drop brings Palo Alto stock price close to a level that was defended well since the market lows of February 2016. Furthermore, shares emphatically broke out of the $120 area in 2014. PANW should require a complete breakdown in the story to relinquish it to the bears again.

Palo Alto Networks PANW stock chart view 1
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My last trade on PANW was a 2016 winning iron condor between $156 per share and $90. I sold risk against both these levels and was lucky enough to expire both sides for max gains. This is a fast-moving stock, so selling risk could be difficult to manage. When dealing with momentum stocks, I find it best to use longer-dated options.

Today, instead of selling a range, I will sell downside risk. The goal: Profiting on a stabilization and partial bounce in Palo Alto shares.

How to Trade PANW Stock Right Now

The Bet: Sell the Jan 2018 $75 put. This is a bullish trade for which I collect $2.5 per contract to open. The 35% price buffer gives this trade a 85% theoretical chance of success. I need PANW stock to close above my sold risk to win. It is important to note that if the drop today is almost equal to the price buffer of this trade. So I have to be ready and willing to own Palo Alto at $85 should price falls below it.

Not everyone is open to selling naked risk. I can restructure this trade to better suit milder risk profiles. This trade would also be a better fit for smaller accounts.

The Alternate: Sell the Jan 2018 $85/$80 credit put spread. This is a bullish trade for which I collect 90 cents per contract to open. The 28% price buffer gives this trade an 80% theoretical chance of success. If PANW stock closes above my sold risk, I stand to gain over 20% yield on risk.

Usually I like to sell opposite risk to balance my trade. In this case, I will refrain from doing so since the drop is too big and I would be selling the upside risk at a severe discount.

Instead, I chose longer-dated options which usually allow for easier risk management should the price action continues to go against me. I am not required to hold my options trades open through expiration. I can close any of them for partial gains or losses at any time.

Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.

Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2017/03/palo-alto-networks-inc-panw-stock-is-a-falling-machete/.

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