Salesforce.com, Inc. (NYSE:CRM) is a shooting start stock that has rallied for years. It used to be the tiny company that could. It is considered to have helped create the idea of the cloud, having been on that band wagon since inception. CRM stock is up 200% in five years.
Management reports earnings this week. The usual is likely to happen.
Regardless of the quality of the report, the CRM CEO will masterfully spin the results as amazing. He will remind us that his company is growing faster than the speed of light. Then he will come on Jim Cramer’s show and broadcast that across the globe.
Other CEOs should learn from Mr. Benioff on how to sell his company’s results. We have had only but a few lingering negative reactions to earnings but mostly Wall Street buys what Salesforce is selling. And therein lies my opportunity.
This is not the same as me saying that CRM stock is sure to rise on earnings. The short-term reaction to those events is binary and somewhat independent of the quality of the report. But I am saying that over time, traders will digest the news and continue the upside trajectory, and I want to profit from it.
Today I want to set a mid-term bullish trade. But this is one that doesn’t need a rally to profit. I will build a moat around my risk so I can still retain maximum gains even if CRM falls in the next few months. This trade will need the macro status quo to linger into early January. I worry about politicians messing things up. They have a habit of nasty surprises around the holidays. This year, there is the added kink of the spending and the corporate tax reforms.
Fundamentally, Salesforce stock is far from a screaming bargain. The stock has risen so much that even with incredible growth, value has yet to catch up with it. It’s not completely bloated. There is value but it’s too high when I compare it to Microsoft Corporation (NASDAQ:MSFT).
But this is not a deal-breaker for me. Wall Street is willing to overlook this for CRM similarly to how they do it with Amazon.com, Inc. (NASDAQ:AMZN). Companies that deliver hyper growth get a free pass on the bottom line especially in a bullish equity cycle like this.
Click to Enlarge Nevertheless, I will set a sizable buffer just in case the price moves against me around the holidays. This is especially important when the CRM stock chart looks like a ramp to the moon. Investors have been buying Salesforce stock fast. This leaves it vulnerable to breakdowns at the first sign of trouble.
Momentum stocks like CRM are tricky to trade. They rise so fast that they scare investors out. Nobody wants to be buying in too late. I use options so I can leave room for error.
CRM Stock Trade Idea
The Trade: Sell the CRM Feb 2018 $95 put. This is a bullish trade for which I collect $1.25 to open. I have an 80% certainty that I will retain maximum gains. But if the price falls below my strike then I own shares. I would then need to manage risk around my breakeven point of $93.50.
Selling naked puts carries big risk, especially for a stock as rich as CRM. For those who want to mitigate it, they can sell a spread instead.
The Alternate Trade: Sell the CRM Feb 2018 $95/$92.5 credit put spread where my risk is limited. Yet if the spread wins would deliver 15% in yield.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose
Get my newsletter for free 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.
