Optimism is boosting shares of Salesforce (NYSE:CRM) ahead of tonight’s earnings, and the software company finds itself a stone’s throw from its old record. Whether you think the rapidness of the recovery is warranted is irrelevant. The tribe has spoken. In the aftermath of the March crash, tech stocks have been dubbed the market darlings once more. And that’s good for CRM stock.
Let’s look at how the stock is positioned ahead of tonight’s big event and build out a trade idea using options data as our guide.
CRM Stock Charts
The weekly chart reveals a long-term uptrend that has gifted shareholders again and again. Before the novel coronavirus came to town to wreak destruction, Salesforce was sitting at an all-time high. Fortunately, the crash and subsequent recovery were quick enough to avoid weighing down the long-term moving averages that have been rising in support of the weekly trend. Right now, the stock sits above its 200-week, 50-week and 20-week moving averages.
Momentum during the ascent has been as robust as you’d expect for a stock that has rallied 59% over the past two months. Drilling down to the daily shows just how consistent the uptrend has been. Retracements have been shallow along the way, with the 20-day moving average providing support during every dip. This week’s action has been particularly bullish and shows buyers aren’t afraid of jamming prices higher ahead of tonight’s report.
Weakness seized tech stocks yesterday morning, dragging Salesforce and other tech stocks lower. But buyers were quick to strike and by day’s end, a long lower shadow had formed. Today’s sharp 4.3% gain is adding an exclamation point to Wednesday’s reversal, and is bringing Salesforce shares within striking distance of February’s highs.
Altogether, the past month of price action has taken on the form of an ascending triangle. This morning’s strength created a breakout that is completing and confirming the continuation pattern. Here’s the bottom line. If you’re taking your cue from the charts, you have to be bullish heading into earnings.
Options Expectations
We don’t have to head into earnings flying blind. Using options data, we can gauge market expectations for the range that CRM stock should trade in after digesting whatever new information comes to light during its quarterly report. To be clear, we’re talking about the magnitude of the move, not the direction.
Right now, the options board is pricing in a move of $6.75. That translates into 3.7%, which really isn’t all that big of a move. Heck, Salesforce is up more than that in today’s regular trading session. If you look at the past four reports, the stock doesn’t have a history of moving much around these quarterly rituals. So, the lackluster expectations for tonight seem in-line with the recent past.
In building a trade into tonight, you have a few choices. First, you could enter a volatility-based strategy and make a bet that the company’s stock will move more or less than expected. Second, you could lean directional into the event if you felt strongly that the stock would rise or fall.
Given the muted expectations, I’m inclined to play direction over volatility. And with the strength behind the price trend right now, it’s impossible not to bet with the bulls. I like selling bull put spreads to create a wide range of profit and to capitalize on the usual drop in implied volatility we see after earnings.
The Trade: Sell the July $160/$155 bull put spread for around 55 cents.
The max gain is limited to the 55 cent credit and will be captured if Salesforce sits above $160 at expiration. The max loss is $4.45, but you will lose far less if you exit on a break of $160.
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