This earning season has been full of seesaw reactions. As we deal headlines of political unrest with Iran for example. So investors have plenty of reasons to reduce risk on every occasion, and rallies offer perfect opportunities.
Last night, Akamai Technologies, Inc. (NASDAQ:AKAM) reported earnings and the stock spiked on the headline. So far it has held the rally. The company delivered a decent report with not much to raise any concerns.
Fundamentally, Akamai stock is not cheap as it sells at price-earnings ratio well above 50. But value is not the selling point for the sector. These tend to be momentum stocks that demand higher valuations based on forward speculation.
The adoption of the cloud is bringing everything on the globe into the electronic arena, so the demand on services like AKAM is only going to increase. Those who are already suppliers have the first mover advantage for years to come.
This is not to say that there won’t be bumps along the road, but investors will overlook short-term imperfection for the carrot of much higher prices down the line. In addition, AKAM is reducing its dependence on its major clients like Facebook, Inc. (NASDAQ:FB) and Netflix, Inc. (NASDAQ:NFLX). It’s good to be diversified so not to get crushed on headlines.
Nevertheless, I don’t like to chase rallies after the fact but in this case I want to participate with caution. I consider today’s trade as a speculative one inside a conservative portfolio.
Instead of buying AKAM shares outright and risking $74 per share with absolutely no room for error, I will use Akamai options instead. There I can building a moat around my risk to account for potential equity market uncertainties not specific to the stock itself.
Technically AKAM tends to trade in bursts, the last of which came in March when the stock rallied to a high of $78 for share. But it had since giving it all back until now. The spike from the earnings report brings the stock much closer to its recent highs. So technically it has momentum to set and hold a new high in the next few weeks.
But it needs the help of the stock market in general cooperates. Macro-economically speaking this is a potentially violent week. We have an important jobs reports, U.S. Fed interest-rate decision, and the tariff exemptions expiring as early as today. So there is definite room for concern and caution.
Click to Enlarge So picking the level of safety is crucial to the success of my strategy. In December of last year AKAM stock rallied over 15% off of the $58 per share which has since become a pivot. Those tend to be support on downturns.
And therein lies my opportunity. I bet that the proven support will continue to hold at least through 2018. Otherwise I will own shares of AKAM at a great discount from today’s levels. This is my version of chasing a stock but from a distance.
AKAM Stock Trade Ideas
The Bet: Sell the AKAM Jan 2019 $57.50 naked put for $2. This is a bullish trade where I have a 85% theoretical chance for maximum gains. Otherwise, I will own shares and accrue losses below $55.50.
Selling naked puts carries big risk, especially for a stock as frothy as AKAM. For those who want to mitigate it, they can sell a spread instead.
The Alternate Bet: Sell the AKAM Jan 2019 $57.50/$55 credit put spread. The spread has the same odds but would deliver 15% yield on risk. Neither trade require a rally to profit. In fact the stock can fall an additional 20% and I could still retain maximum gains.
Click here to see how this trade fits within the macroeconomic picture and for an ongoing free copy of my recap.
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.