Salesforce.com, Inc. (NYSE:CRM) is a momentum stock that seems to have only one direction, which is up. The CEO Marc Benioff represents his company very well. Few CEOs can pump their own company accomplishments like he can, as seen by the jump in Salesforce stock.
CRM was arguably the company that set the cloud services model on fire over 15 years ago. They were the mini-me that defeated the Microsoft Corporation (NASDAQ:MSFT) giant. Now they have momentum on their side since the whole world is going into the cloud.
I want to bet long CRM stock along with the enthusiasm that Mr. Benioff portrays. In last night’s report, they beat expectations and guided higher.
Considering that so much enthusiasm had been building since the Dreamforce conference, the Salesforce stock reaction is even more impressive. Mr. Benioff called it a “blow out quarter” and more importantly placed a target towards doubling their revenue run-rate to $20 billion.
And there in lies my opportunity.
How to Trade Salesforce Stock
Fundamentally, the traditional valuation metrics do not do it justice. Needless to say, it’s not cheap. Its price-to-book ratio is over 10. Traders give this cloud company a pass because of its growth trajectory and a solid balance sheet, so in the absence of traditional tangible value, my bullish bet is on its price action.
I am confident that the management team will successfully keep this boulder moving at the same pace of growth.
I usually like to buy quality companies on dips, but Salesforce stock is one that doesn’t offer many of those opportunities. Such momentum stocks rise so fast that they perpetually seem like they are due for a dip. For that reason, I use the CRM options where I can build buffers when taking bullish trades.
So instead of buying the shares outright and leaving no room for error, I prefer selling downside risk against proven support. Thanks to an elevated level of fear, mainly the CBOE Volatility Index (INDEXCBOE:VIX), premiums are inflated so that too should work in my favor provided the fear eventually abates.
The experts agree with me since they mostly rated Salesforce stock a buy. The CRM price is above their average targets, so basically they are expecting big things. The danger there is that if and when it falls out of favor, it could unravel fast. That’s why using the options makes even more sense.
There is also the CNBC factor to consider; Jim Cramer takes every chance to pump Salesforce stock as a gem. So in times of trouble, this could be an additional prop under the stock, much like Mr. Buffet is under Apple Inc. (NASDAQ:AAPL). That alone is not a reason to go long the stock, but it’s an added layer of support.
The Trade: Sell the CRM AUG $95 naked put and collect $1.25 to open. Here I have a 85% theoretical chance that I would retain maximum gains. But if the price falls below my strike, then I own the shares and would suffer losses below $93.75.
Selling naked puts is daunting, especially near all time high stock markets and in such a volatile stock. Those who want to mitigate that risk can sell spreads instead.
The Alternate Trade: Sell the CRM AUG $97.50/$95 credit put spread. The spread has the same odds, but would deliver 20% yield on risk. Neither trade requires a rally to profit. In fact, Salesforce stock can fall an additional 17% and I could still retain maximum gains.
Ultimately, 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.
