The battle for cloud computing dominance brings several companies to mind, Microsoft being the front-runner. But we'd be hard pressed to find both technical strength and fundamental growth prospects much better than Dynatrace.
In the IBD Stock Checkup, Dynatrace is No. 2 in the enterprise software industry group.
The trade is a short put spread expiring in June. It gives the chart a space to jockey around and allow theta (time) erosion to work in our favor.
Option Trading: Bullish Outlook In Near Term
This trade is a bullish position and anticipates the stock will hold above 40 over the near term.
Sell to open the DT June 16 expiry monthly 40 puts, and buy to open the DT June 16 35 puts.
- Total credit received is $1.25
- Total risk is $3.75
Total spread between strikes at $5.
The break-even price for Dynatrace at expiration is $38.75.
Why consider Dynatrace? Participation in the cloud computing space opens access to a field that includes Salesforce, Amazon.com and ServiceNow along with Microsoft.
But Dynatrace holds something special: technical strength and limited volatility.
Limited volatility is a two-edged sword that allows us the likelihood of less-than-spectacular moves but instead delivers a slow and steady return. Because of this lower volatility, our premium collected is a bit lighter and the total risk is a bit higher.
So, what's the trade-off? Although our premium intake is less, the probability that we are able to collect the entire premium is much greater than the chance of incurring a loss.
Trade Exploration And Rationale For Decision
Identify the key chart levels.
Supported congestion can be seen at 38 price level.
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Scenarios For DT Options Trade
What could happen:
- The stock moves within the overall range of support noted above into the expiration week and we collect full profit.
- The stock moves into our 50% profit line — when the position is worth around 0.65 — and we exit the trade.
- The stock rallies and stays well over 40 and we collect the full profit.
- The stock fades under heavy volume and does not recapture 38 after several days. The closer we are to expiration, the more tenuous it becomes to hold the position.
As with all trades, consider what you like about holding the position in the first place, and consider your risk carefully.
Anne-Marie Baiynd is a 20-year veteran trader of stocks, options and futures and is the author of "The Trading Book: A Complete Solution to Mastering Technical Systems and Trading Psychology." She holds no positions in the investments she writes about for IBD. You can on Twitter and Stocktwits at @AnneMarieTrades
