Salesforce.com, Inc (NYSE:CRM) reported earnings Tuesday evening and CRM stock is soaring!
The company met metric expectations but, more importantly, raised forward guidance. These days, Wall Street is more interested in the future rather than actual quarterly results. We’ve seen stocks decimated after beat expectations but throwing out muted guidance.
Not Salesforce.
CRM is the original cloud play. It was a pioneer in using the internet to drive day-to-day operations, competing against giants like Microsoft Corporation (NASDAQ:MSFT) and dispatching them handily. Salesforce CEO Marc Benioff has excellently portrayed the accomplishments of the company, laying out the tremendous potential that still lays ahead even at these levels.
The reaction to the earning headline was a sharp spike to $133 per share. All the more impressive considering the 20% runup CRM stock has seen this year. It’s a market-beating gain, sure, but Salesforce stock still lags other mega-momentum tech companies, such as Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX).
How to Profit in CRM Stock
Usually, I sell downside risk into fear scenarios to generate income but, in this case, I can also bank on Salesforce’s upside potential. My view on the market remains positive for the year and, in this scenario, CRM will be higher in the mid- to long term. So I want to chase upside “hopium.”
But instead of risking $132 per share without any room for error, I will use options where I can eliminate immediate out-of-pocket risk.
Technically, it’s never a perfect time to enter momentum stocks. When Salesforce.com stock is rallying it does it so fast that it looks ready for a correction at any time. So I can’t wait for the perfect signal. The catalyst from Salesforce’s earnings report is enough to give CRM stock another run higher into the summer.
Fundamentally, CRM shares are expensive, but as long as it continues growing at the rate it has been, it isn’t value you should seek — growth stocks should be judged only from that perspective until their growth rate dies.
Today’s setup is a pair trade where the first would capture the upside potential and the second finances that opportunity.
The Upside Potential: Buy the CRM Aug $135/$140 call spread, where I pay $1.50 for a chance almost triple my money if price rallies through my strikes.
To mitigate risk, I sell downside risk into unreasonable fears to eliminate my out-of-pocket expense.
The Bank (Optional): Sell the CRM Nov $110 put for $2.20. This is a bullish trade with 85% theoretical chance of success.
The result of the pair trade is a net credit. So as long as the price stays above my puts, any premium I recapture from closing my call position would be incremental profit.
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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.
