2 Great Ways to Trade Zoom Stock Ahead of Q2 Earnings

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The enthusiasm for Zoom Video Communications (NASDAQ:ZM) is palpable ahead of Monday night’s earnings report. With the share price nearly doubling since last quarter’s announcement, there’s no denying buyers have priced in a great deal of growth. Let’s break down how ZM stock is shaping up ahead of the main event, and determine how options traders might play it.

zoom (ZM) logo on a building

Source: Michael Vi / Shutterstock.com

From a sentiment perspective, Wall Street couldn’t be any more enthusiastic about Zoom’s prospects. Economic reopening has done little to slow the willingness of buyers to chase its stock to the moon.

But the bullish undertones aren’t unique to ZM. Many other high-profile companies that were thrust center stage in the wake of the novel coronavirus, like DocuSign (NASDAQ:DOCU), are also seeing their uptrends continue. The widespread euphoria surrounding work-from-home stocks should continue providing a tailwind for ZM.

Of course, the backdrop of a booming tech sector isn’t hurting matters either. You can’t throw a stick these days without hitting a half dozen beautiful booming charts in the Nasdaq Composite.

ZM Stock Chart

Zoom (ZM) stock chart showing record highs

Source: The thinkorswim® platform from TD Ameritrade

On the charting front, Zoom recently emerged from a sideways consolidation, energized for more upside. The breakout was a bullish victory for two primary reasons. We’ll start with the less obvious one. Earlier this month, ZM stock cracked through significant support and its 50-day moving average on heavy volume. The distribution day sent shareholders scurrying and cast an ominous cloud over the entire chart by completing a double-top pattern.

And then, buyers swooped in to invalidate the breakdown. It quickly became a bear trap, and the stock has been ripping higher ever since. Last week’s breakout over $280 completed the comeback.

The second reason is simple. When prices push through a significant ceiling, it signals a new up-leg has begun. A pair of accumulation days have cropped up over the past two weeks to confirm institutions are entering the fray. And we just tagged a new record high on Wednesday.

Toss in rising moving averages across all time frames, and you have as bullish a brew as any. The million-dollar question is whether traders have pulled too much future growth into the present. Will Monday’s earnings numbers justify the meteoric gains of the past quarter? I’m willing to bet yes, but even if the stock gets sold afterward, the dip will prove a buying opportunity.

How to Trade Zoom Video Here

Let’s turn to the options market to discover just how large a gap is expected. Implied volatility is running hot at the 50th percentile. The one-week straddle is pricing in a move of $37.50. That translates into a 12.7% range over the six trading sessions. You’ll have to decide if you want to take the over or under on that, but I usually lean on selling volatility into the event.

Given the trajectory of the trend, I think it is incredibly difficult to want to carry a bearish trade into earnings. If anything, I’d deploy a pure short volatility trade via iron condors, or simply sell the bull puts if you want to lean bullish. Here are the strikes I’d consider.

Iron Condor Trade: Sell the Sep $220/$210 bull put and the $380/$390 bear call spread for a net credit around $1.30.

Consider this a bet that ZM stock stays between $220 and $380 for the next three weeks. The initial cost is $8.70, and the max reward is $1.30.

Bull Put Trade: Sell the Sep $240/$230 bull put for $1.00 credit.

With this position, you’re wagering that Zoom gaps higher, treads water or just doesn’t fall more than 18% after the event. Your max loss is $4, and the max gain is $1.

On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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Article printed from InvestorPlace Media, https://investorplace.com/2020/08/how-to-trade-zoom-zm-stock-ahead-of-earnings/.

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