Salesforce stock has been hammered this year, down nearly 30% year-to-date, making it the most oversold stock in the Dow Jones. But extreme weakness can sometimes create opportunities.
After finding support near 230 and flashing a bullish reversal candle yesterday, Salesforce is showing early signs of stabilizing.
A recent uptick in accumulation suggests some buyers are stepping in. That makes it a candidate for a defined-risk, income-generating bullish trade.
I'm willing to bet that Salesforce stock will recover, or at worst, not drop too much between now and the end of the year.
Salesforce Stock: Long-Term Bull Put Spread
When it comes to options, we normally look at short-term trades. Anywhere from one week to one month. Today, we will look at a longer-term bull put spread.
Longer-term option trades tend to move a little slower than shorter-term trades. That allows more time to adjust or close, but also means a lower annualized return. It also lets us place our strikes much further from the stock price than usual.
As a reminder, a bull put spread is a defined risk strategy, so you always know the worst-case scenario in advance. This type of trade will profit if Salesforce stock trades sideways or higher and even sometimes if it trades slightly lower.
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With Salesforce stock trading around 237, if we use the Dec. 19 expiration, we can sell a 190 put and buy a 185 to set up the bull put spread. That spread is trading around $0.75. Selling this spread would generate roughly $75 in premium with a maximum risk of $425.
If the spread expires worthless that would be a 17.65% return in four months provided Salesforce stock is above 190 at expiration. That seems like a pretty reasonable bet to me.
The 190-strike put has a delta of 14, which means it has a roughly 86% chance of expiring worthless.
Maximum Loss
The maximum loss would occur if Salesforce stock closes below 185 on Dec. 19, which would see the premium seller lose $425 on the trade.
The break-even point for the trade is 189.25 which is calculated as 190 less the $0.75 option premium per contract.
I would set an adjustment point or a stop loss if Salesforce drops below 215. Otherwise, another good rule of thumb is to limit the loss to the amount of premium received which in this case would be $75. Sticking to this stop loss level will help avoid large losses if the trade goes south.
One downside with Salesforce is the poor IBD Ratings, so this is very much a contrarian style trade rather than a trend following trade.
According to the IBD Stock Checkup, Salesforce stock is ranked number 41 in the enterprise software group and has a Composite Rating of 46, an EPS Rating of 90 and a Relative Strength Rating of 11.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a masters in applied finance and investment. He specializes in income trading using options, and is conservative in his style. He also believes patience in waiting for the best
setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.
