If you like to buy growth at a discount, Arista Networks (NYSE:ANET) is offering investors a bargain right now. But if you want this value opportunity in ANET stock securely gift-wrapped, a well-positioned bull call spread makes a good deal of sense. Let me explain.
It has been literally and figuratively all downhill on the price chart of ANET stock the past month — and in the minds of sometimes-fickle investors. Since spiking in excess of 9% and narrowly breaking out in late August on news the cloud networking solutions outfit was joining the ranks of the S&P 500, shares of Arista have corrected by nearly 15%.
So what gives? Why is ANET stock down — and more perversely, at a time when the large-cap index is up about 0.8%? Following some modest profit-taking from Arista’s sizable index-driven jockeying stock move, a brokerage downgrade early this month appears to have been the primary driver behind the more cautious behavior of late.
On Sept. 4 Morgan Stanley hiked its price target on much larger networking rival Cisco Systems (NASDAQ:CSCO), citing that company’s products will be more attractive to internet customers upgrading to next-generation cloud computing. At the same analysts there cut their rating on ANET stock to equal-weight from buy.
Immediately following the shot over ANET stock’s bow, shares tumbled more than 9% over two sessions. And despite Arista’s platform continuing to gain traction with prized customers like Microsoft (NASDAQ:MSFT), shares have been essentially slapped with a ‘hold’ rating by traders with ANET stock hoovering near its lows of the past couple weeks.
ANET Stock Weekly Chart
In this strategist’s view the about-face and pause by investors is giving ANET stock bulls a nice opportunity to buy growth at a discount. The truth is some bulls may rightfully feel cheated by Arista’s breakout and subsequent technical failure out of a fairly large and healthy corrective base. Instead, if we continue to look at ANET’s long-term prospects off and on the stock chart, the present corrective malaise should prove temporary and a gift-wrapped occasion for another bull call spread.
ANET Stock Options Strategy
Last month and following ANET stock’s breakout, I proffered a shorter-term, out-of-the-money call vertical as a way to gain upside exposure without the headache of increased risk if the price chart didn’t live up to expectations. While a rally certainly would have been preferred, the approximate 1% risked proved to be a very nice insurance policy.
For very similar reasons (as well as “just okay” liquidity), I still prefer going with a bull call spread for positioning. This time however, I’m favoring an intermediate-term vertical. With ANET stock at $265.75 the March $320/$350 call vertical for $5.30 has our attention.
Priced for just under 2% of the risk associated with owning Arista shares, this position also has two earnings catalysts built into its design and demands ANET is fully reaffirming its bullish trend by hitting new highs in order to profit at expiration. If we’re correct and Wall Street wakes up to a still bullish-looking big picture for ANET stock, a profit of up to $24.70 or return of 466% is possible at expiration if shares are above $350.
Bottom line, this vertical requires a rally of about 30% from current levels and roughly 10% above the recent high to capture the max profit at expiration. And for many investors, right now that must seem unfathomable. But the reality is that kind of price move is well within reach of a volatile trader like ANET stock, but sprinkled with a bit more of the favorable price gyrations temporarily M.I.A.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.