Who knew Zoom (NASDAQ:ZM) would be a bastion of strength at a time when investors were abandoning stocks? It turns out when pandemics and quarantine become the fears of the day; video communication is the ultimate safety trade. With ZM stock booming and an earnings report looming, now is a perfect time to determine how to trade the Street’s new hot stock into its announcement.
Zoom has been trading like an inverse ETF or Treasury bonds. To wit, the 10-day correlation coefficient between Zoom and the S&P 500 is -0.72. Last Friday the S&P 500 gapped lower but ripped higher to close with a massive bullish reversal candle. Meanwhile, ZM gapped higher and crashed lower all day ending with a huge bearish engulfing candle.
Shareholders must be pleased with Zoom’s relative strength last week. Friday’s jump tagged a record high, pushing its year-to-date gains to 63%. At the same time, the Nasdaq (which is probably a better benchmark to compare to versus the S&P 500) moved its 2020 performance well into losing territory.
From a technical perspective, ZM stock is firing on all cylinders. It’s above every major moving average, boasts accumulation galore, and has remained utterly unphased in the face of the coronavirus hysteria.
But with earnings scheduled for March 4, we’re about to see if the company’s sales growth has been sufficient to warrant such a significant run-up since December’s report. Will reality prove rosy enough to support such lofty expectations?
I have no clue. The market is certainly forecasting improvement, and I’d much rather bet with the crowd than against them right now. Rather than buying the stock outright, however, I prefer to use the elevated volatility to my advantage by building a high probability options trade.
ZM Stock Volatility is HUGE
We’ve seen an enormous surge in options demand alongside Zoom’s ascent. The willingness to pay up for derivatives is understandable for two reasons.
First, ZM is an incredibly volatile stock right now. The Average True Range (ATR) is around $8, which suggests it’s been moving around 8% on average per day. That is the highest reading since ZM went public last year.
Second, an earnings announcement is coming, which increases the range of potential outcomes over the next few weeks. Implied volatility pushed as high as 110% on Friday but has since retreated to 88%.
If you’re leaning bullish into earnings, then bull put spreads aren’t a bad way to go.
The Trade: Sell the April $80/$75 bull put spread for 60 cents.
Consider it a bet that Zoom sits above $80 at expiration. The max reward is 60 cents, and the max risk is $4.40.
As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. For a free trial to the best trading community on the planet and Tyler’s current home, click here.
