Trading Palo Alto Networks Inc (NYSE:PANW) is not for the faint of heart. This is a stock that moves in violent waves. This is different than a momentum stock that runs fast or long. So entry and exit points are crucial here, especially given that PANW stock has a three digit price tag of $150 per share.
In the past 12 months Palo Alto Networks has made three 25% moves. Just after the U.S. November elections, it suffered a tremendous blow, then in March just after it had recovered from it, the stock gapped down even larger than the first time.
It took until now to completely bounce and fill that gap.
Now PANW stock has been setting higher lows knocking on a neckline area that should open the door for an overshoot higher to test $160 per share. This is the opportunity that I want to capture here.
I am not one to buy and I hope for a rally to materialize in order to profit. Instead, I prefer to bet on proven support levels so I can generate income. This way, instead of risking $150 per share without any room for error, I create profits with no out-of-pocket risk to me. The trick is to find levels where Palo Alto Networks stock is not likely to fall below.
It’s hard to find value in PANW stock since it operates in the red. Furthermore, its price-to-book is almost 20, which is high relative to its competitors and in absolute terms. Gross margins are attractive, but management has yet to find a way to make them trickle down to the bottom line.
Security is on the forefront of headlines brought to light by the massive data breach in Equifax Inc. (NYSE:EFX). In reality, I believe that no system is a fortress and that eventually, security network companies like PANW will have their bad headlines too.
But for now, I trade the price action of Palo Alto Networks stock.
Bottom Line on PANW Stock
Technically there are several areas of support created by the stepladder action that the stock trades in. $128 per share is one of them and I want to use that as my main line of defense for this trade. The key to my strategy is that I’m willing and able to own the shares below that level should the price go against my thesis into year-end.
The trade: Sell PANW Dec $ put and collect $1.25 per share to open. Here, I have an 85% theoretical chance of having the price stay above my strike. Otherwise, I will own the shares and suffer losses below $123.75.
Selling naked puts is daunting, especially in a volatile stock like Palo Alto Networks. So those who want to mitigate some of the risk they can sell a spread instead.
The alternate trade: Sell PANW Dec $125/$120 where I have about the same odds of winning. If so, the spread would yield 10% on risk.
Regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose.
Learn how to generate income from options 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 as @racernic on twitter and stocktwits.