Zoom Video Communications bounced nicely Wednesday, though it gave it all back Thursday. Today we will look at an options strategy that would benefit from resumed strength over the next few weeks.
According to the IBD Stock Checkup, Zoom stock is ranked No. 35 in its group and has a Composite Rating of 40, an EPS Rating of 89 and a Relative Strength Rating of 8.
One way to get long Zoom stock while risking less capital is by using options. This strategy also takes advantage of the current market volatility, with short-term options having higher volatility than longer-term options.
We're going to look at a bullish calendar spread, which is a trade that involves selling a short-term option and buying a longer-term option with the same strike price.
Traders with a price target of 130 could place the bullish calendar spread at that price.
Maximum Profit Of $900
Selling the June 17 expiry, 130-strike call option will generate around $550 in premium, and buying the July 15, 130-strike call will cost around $725.
That results in a net cost for the trade of $175 per spread, which is the most the trade can lose.
The estimated maximum profit is around $900, but that can vary depending on changes in implied volatility.
The idea with the trade is that if Zoom stock trades up to around 130, the calendar spread will increase, resulting in a net profit. That's about a 28% climb from today's price, so Zoom stock would have to rally in just a few weeks.
A bullish calendar spread is a good way to gain some upside exposure on a stock without risking too much if the move doesn't materialize.
Ideal Scenario A Rise To 130 Around Expiration
The ideal scenario is a rise up to 130 around June 17 with little change (or rise) in implied volatility.
The combined position has a net delta of 17, which means the trade is roughly equivalent to owning 17 shares of Zoom Video, although this will change as the trade progresses.
For a trade such as this, I would set a profit target of 30% and a stop loss of 20%.
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, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
