Athenahealth, Inc (NASDAQ:ATHN) reported earnings and Wall Street hated what it saw. The company disappointed on several metrics, and ATHN stock fell more than 19% and into double-digit territory.
Fundamentally, there is not much wrong with ATHN’s model, so the long-term prospects did not materially change because of this bad report. But, at over 200 times earnings, its stock is not cheap, so I can’t say that it won’t fall further. On the bright side, the threat of downgrades should be limited since analysts are evenly distributed in their ratings among three levels.
Today, I want to commit long by selling downside risk, but after a plunge this big, I have to evaluate its technical health. Although, on the shorter-term charts, I see the potential of support around $92.50. The monthly chart shows potentially ominous patterns forming.
If, for some reason, ATHN stock loses $90 per share, it could invite technical sellers chasing a giant inverse cup-and-handle formation all the way down to retest $70, which is a level not seen since 2013.
Click to Enlarge Missing a few estimates is one thing, but I am not sure it’s worth negating athenahealth’s efforts for the last four years. I can accept the Street’s rejection of $140-plus per share as too high, but as long as nothing materially changed in their model, I can also make the assumption that $75 would be just as wrong. I am willing to sell risk below it to generate income with confidence.
The Bet: Sell the ATHN Dec $75/$70 credit put spread and collect $1 per contract to open. This is a bullish trade that has an 80% theoretical chance of yielding 20% on risk. I don’t need athenahealth to rally … I simply need its stock to stay above my spread to retain my maximum reward.
For a more aggressive commitment with a bigger reward, I can sell naked puts … but I only do this if I am willing and able to own the shares at that price. (Note that I can start with a credit put spread then decide to sell the protection leg for a bigger potential reward.)
The Bigger Bet: Sell the ATHN Dec $65 put for $2 per contract. Both trades have similar chances of success, but this one carries a bigger risk starting at the strike sold.
Learn options as easy as 1-2-3 in a personal 1on1 webinar here. 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.