Go Long Calls in Cognizant Technology Solutions (CTSH)

Wait for CTSH to trade through yesterday's high to open calls

   

Down, down, down….That’s how most stocks seem to be trading these days. Just like the market was due to pull back, some stocks are due to move higher again even if it’s temporary. Here is a trade idea on stock that fits that very description.

Cognizant Technology Solutions Corp. (NASDAQ:CTSH): Long Calls

4 18 13 CTSHchart 300x122 Go Long Calls in Cognizant Technology Solutions (CTSH)The trade: Buy the May 70 calls for $3.50 or less.

The strategy: The long call is one of the most basic strategies in options and is used for a bullish outlook on the stock. The strategy can profit if the stock rises and the call premium increases to an amount more than was paid. Maximum profit is unlimited because CTSH can continue to rise and the maximum loss is $3.50 or whatever was paid if CTSH finishes below $70 at May expiration. Breakeven is at $73.50 at expiration based on a cost of $3.50.

The rationale: Cognizant Technology provides IT, consulting and outsourcing services around the globe. The company is generally well-regarded by many analysts and is slated to announce its next earnings on May 8. The company is expected to announce earnings of $0.93 a share and revenue of just over $2 billion. The stock has suffered as of late, after a report was released last week that said PC shipments dropped by 14% in the first quarter.

Looking deeper into this drop, the stock has fallen to an area of support; the daily 200 simple moving average (SMA). Of course there is no guarantee especially in this slightly bearish market that the stock will bounce and reverse off the 200 SMA. Traders should lean towards the side of caution and possibly wait for a bullish sign like the stock trading through Thursday’s high which was $71.28. If that never happens then the bearishness of the stock or the market was just too much for it to overcome. Even if this trade idea is profitable, it may not be prudent to hold the position through the unpredictable earnings announcement scheduled for May 8.

 

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