Salesforce.com (NYSE:CRM) shares find themselves among the top gainers on Wall Street today. The 4% surge becomes even more significant when you realize it’s creating a clear breakout above what was an impenetrable ceiling. With record highs on the horizon, now is as good a time as any to consider bullish plays for CRM stock.
After scanning the broader tech sector, we’ll dive into CRM’s chart and implied volatility levels. Then we’ll build out a trade that will deliver big profits if Salesforce can visit $200 by August.
NASDAQ at 10k
One of the contributing factors to CRM’s general strength is the market’s continued obsession for the technology sector. Of the major indexes, the tech-heavy Nasdaq fell the least during March’s meltdown. It was the first one to return to record highs. This month saw the Nasdaq Composite Index reach a new milestone by surpassing 10,000 for the first time in history.
Last Thursday’s sharp selloff tested dip buyers’ resolve, but I’d say they came through the crucible with flying colors. This week’s bounceback kept the Index above the rising 20-day moving average, returning it to flirt with 10k once more. It has now been five days since Thursday’s whack, and we’ve yet to see a second shoe drop. Overall, the price action is healthy, and this is about a good of a response as bulls could have hoped for after last week’s shockwaves.
Consider the resumption of technology’s uptrend a big green light for traders looking to chase CRM stock’s breakout.
CRM Stock Heading to $200
While not the cleanest looking uptrend, the price movement in Salesforce has followed the bullish script since March. Buyers have snatched up shares on every dip, and breakouts have delivered quick profits. Along the way, we vaulted back above all major moving averages. And now the 20-day, 50-day, and 200-day averages are all trekking higher.
What I like most about today’s breakout is the length of the consolidation pattern that preceded it. CRM has gone nowhere for six weeks. All the while, it’s been building up energy for its next advance while working through overbought pressures. With the stock thoroughly rested, there should be plenty of gas in the tank to carry it back to February’s high and beyond. Given the peak’s proximity to the major round number of $200, I think that’s the logical upside target.
I suspect this breakout would have arrived last week, but Thursday’s post-Fed shenanigans created a detour. CRM stock jammed to resistance and was a whisker away from breaching the $183 ceiling. Having another week of consolidation did nothing to sour the overall setup, though. If anything, it allowed the spring to coil a little longer in preparation for today’s pop.
Bull Calls for Big Profits
In selecting which options strategy is best for capitalizing, I use implied volatility. It reveals whether options are cheap or expensive. Right now, the implied volatility rank is 27% and suggests premiums fall on the lower end of the spectrum. Long calls are worth consideration, but with CRM stock nearing $200, I think I’d prefer a call spread to reduce the cost. It will also enhance the leverage around current prices.
The Trade: Buy the August $190/$200 bull call spread for around $4.20.
The original cost represents the max loss and will be forfeited if CRM sits below $190 at expiration. To minimize the damage, you could exit the position if we break the $170 support zone.
The max gain is limited to the spread width minus the trade cost, or $5.80. You will capture it if CRM rises above $200 by expiration. By risking $4.20 to make $5.80, the spread offers a mouth-watering 138% return on investment.
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