Another Trade On Track For A ~200% Gain: The Approach We Used To Find This Setup.

The Rest Of The Story

The great radio broadcaster Paul Harvey used to tell a fascinating biographical story, before breaking for a commercial. After the break, he'd reveal who the protagonist of the story was, usually some famous historical figure. And he'd close with, "And now you know the rest of the story". 

This post is a "rest of the story" follow up on last week's post about betting on a stock that plummeted post-earnings. 

More about that below, but first, let me explain why the title of this post refers to another trade on track for a ~200% gain. The previous trade on track for a ~200% gain is our call spread on Carvana, Co. CVNA, which I mentioned in Wednesday's post (Volkswagen Puts Our Rivian Bet In The Black): 

We bought the $120 strike calls on CVNA expiring on August 16th, and sold the $121 strike calls on it expiring on the same date, for a net debit of $0.30. The way call spreads work, your maximum gain is the difference between the two strikes, so, in this case, $1. 

Basically, we (my subscribers and I) entered this trade at $0.30 per contract, and as long as Carvana is trading at over $121 on August 16th, we'll be able to exit the trade at close to $1, which would be more than a 200% gain from where we entered it. CVNA closed at $132.88 on Thursday, so this one's looking good. 

Let's talk about why we've been aiming for 200% gains and then we'll get to our latest trade that's on track for a ~200% gain. 

About Aiming For 200% Gains

I've started doing this for two reasons: 

• 200% gains are often possible with these types of trades, if you aim for the outer edge of the expected movement of the stock. 
• Since these trades cover periods that include earnings releases, and those can be coin-flip events, if we can get a 200% gain on our winners, we can do well even if our win rate is less than 50%. 

Our Latest Trade On Track For A 200% Gain 

In last week's post, I described the attributes of the stock we were betting on: 

The stock we’re betting on today is another former high-flyer that plummeted post-earnings, dropping about 20% after beating on earnings but slightly missing on revenues. This time, though, we did a few things differently:

• We didn’t bet on it right after earnings, which were last month. We waited for prices to consolidate a bit. We’re not getting in at the post-earnings bottom, but the stock is still down about 15% from were it was pre-earnings. And we know now that its post-earnings plunge wasn’t the start of an extended slide, as with LULU and SNOW.

• We paid attention to valuation. This stock had an overall valuation rating of 4 pre-earnings, according to Chartmill, and after that drop it has an overall valuation rating of 6. Its other fundamentals are strong too: a profitability rating of 8, a health rating of 7, a growth rating of 8 (all on a scale of 0-10), and a Piotroski F-Score of 9 (on a scale of 0-9).

• We waited to get the options prices we wanted, placing a limit order that took over a week to fill.

Our options trade today is a bet that this stock will erase half of its current 15% post-earnings drop after it releases earnings next quarter. If we’re wrong, our maximum loss on this trade will be 100%, and if we’re right, our maximum gain will be about 200%.

I ended that post with a "Read the rest here.", but this was the rest of the story: 

The company is Salesforce, Inc. CRM, and the trade is a vertical spread expiring on September 20th, buying the $240 strike calls and selling the $250 strike calls for a net debit of $3.30. The max gain on 1 contract is $670, the max loss is $330, and the break even is with CRM at $243.30.

Salesforce closed at $252.85 on Thursday, so (since the max gain on this trade occurs with the share price at $250 or higher), this one is on track for another ~200% gain (I use the ~ here because I'll probably try to exit this spread at a net credit of $9.50 or $9.75 instead of holding out for $10). 

We Could Take (Lower) Profits Now

Those who entered this trade last when we did and would rather not wait until September to see if Salesforce is still above $250, can take lower profits now. Going by options prices as of yesterday's close, we probably could have exited our Salesforce spread at a net credit of about $5.95 yesterday, which would have given us an 80% profit. 

Join Us On Our Next Trade

The next trade we have teed up is on a stock that has elements in common with both Carvana and Salesforce. Like Carvana was at the time, this stock is a current Portfolio Armor top name. And like Salesforce, it's a stock that got punished post-earnings. 

If you'd like a heads up when that trade fills, feel free to subscribe to our trading Substack/occasional email list below. 

 

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