Palo Alto Networks Inc (NYSE:PANW) still hasn’t recovered from the reaction of its last earnings when it fell over 20%. Since then, it has drifted lower still.
PANW stock often trades as a momentum stock and at breakneck speeds. When those move, they force most investors to stay out. On the way up, momentum stocks always seem over-extended; on the way down, they seem like abysses.
This doesn’t mean that they are untouchable, however. I can use the options markets to participate with a decent chance of success.
Today I want to share a trade that attempts to cautiously catch this falling knife. I know it’s daunting to commit long a stock that seems to have no bottom, but I think it’s worth a test for the mid-term, provided I build in a big enough room for error.
Click to Enlarge Our world is becoming more dependent on technology at a record-breaking rate. So fundamentally, logic dictates that in this ever-increasing cyber security risk PANW should thrive. Eventually it should be able to figure out the metrics to reflect a successful executable profit model. From here, I either believe it’s a viable company or I stay out completely.
Technically and after drops this big, it is imperative to zoom out to examine a longer-term chart. The weekly Palo Alto chart shows that the stock is now back at 2014 pivot levels. Yet I am not about to risk $110 to buy the stock outright. My money would be immediately at risk and with no buffer.
Instead, I will use the options market to build an additional 30% buffer from current levels.
PANW Stock Trade Idea
The Bet: Sell the PANW Sep $75 put for $1 per contract or better. In theory, this trade has a 90% chance of success. I need Palo Alto Networks stock to stay above $75 through September, else I would be put the stock and anything below $74 would accrue losses for me.
This is not saying that I expect the stock to bounce. All I need it to do is stay above $75 by mid-September. Although this trade has a 90% theoretical chance of success, I want to take extra precautions.
The Temporary Hedge: Just so I can better sleep through June, I will also buy the June PANW $75 put for 15 cents. A small price to pay for some peace of mind especially through their next earnings release.
Taking both trades reduces my potential profits a little but also guarantees me profits through mid-June even if Palo Alto goes to zero. In essence the trade would be short a put calendar. I don’t usually do these, but in this case it could work.
Learn options as easy as 1-2-3 in a personal 1on1 webinar here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
