Last week was a busy one for earnings, and this week promises to be just as exciting. It’s obvious that Wall Street has been rewarding companies that have done well with earnings beats and raised guidance. Companies that have missed expectations have seen their stock prices fall by double-digit percentage points.
While I try to avoid these types of setups with most of my option trades, dabbling in an earnings trade or two can be worth the risk/reward given the current volatility. However, it is also important to do the fundamental and technical homework for an earnings trade to better the odds of being successful.
One company reporting this week, Citrix Systems (CTXS), has a bullish setup heading into its announcement on Tuesday.
To start, shares are near their 52-week peak of $73.12. The stock has been in a solid uptrend since bottoming at $56.47 in mid-January.
“Golden crosses” formed in late May and June with the 50- and 100-day moving averages crossing above the 200-day moving average. On a technical level, the action looks bullish.
However, there is additional multi-year resistance at $75 and up to $80 as you can see in the following five-year chart:
As far as earnings, the company matched estimates of 65 cents a share last quarter but missed on revenue by nearly $2 million. In late January, Citrix beat by 7 cents after reporting a profit of $1.10 a share. Revenue of $851 million also topped forecasts for $844 million.
The two previous quarters showed earnings beats by 2 cents and 22 cents, respectively. The 2-cent beat was accompanied by a revenue miss of nearly $13 million when earnings were announced in October. The 22-cent smash in July 2014 came on revenue of $782 million versus expectations for $772 million.
The earnings beats look great on paper, but the erratic revenue hits and misses are a concern and make going long risky. However, an earnings beat on both the top and bottom lines, along with raised guidance, would be a bullish catalyst for fresh 52-week highs.
On that note, the Aug $72.50 calls could be used by bullish traders looking for a breakout past $75.
Bearish traders could target the Aug $65 puts for a back test to $65-$60 on a possible earnings miss or lowered guidance.
Another interesting development concerning Citrix is the activist investor stake in the company. In June, Elliott Associates announced a 7.1% stake in Citrix that sent shares soaring 7% from just south of $66 to north of $70.
Elliott likes the company’s current CEO but believes shares could be worth $90-$100 in 2016 if “operational” changes were made. One brokerage firm supported that thesis and maintained a “buy” rating on the stock. It also raised its price target from $74 to $89.
The following day, four brokerage firms made bullish comments about the stock with “buy” ratings and price targets ranging from $75-$88. More than a month has passed since these comments, so shares are somewhat back under the radar.
Citrix stands to benefit from the adoption of Windows 10, but additional revenues might not hit until next quarter.
The two aforementioned options would also make for a great strangle option trade. With a premium of just under $2 for both options, CTXS shares would need to be above $74.50 or below $63 by mid-August for the trade to break even, technically. A drop to $61 or a run past $76-$76.50 would provide a triple-digit return.
The aggressive trader in me wants to go long call options ahead of earnings, but the safer trader in me is screaming for a strangle trade. This will be a big quarter for the company, so I’m expecting that shares could move 8%-10% from current levels.
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