Trade Update April 17th, 2012: Well it’s days like today that a little risk management can go a long way…..over the last few days as the market sold off, I trimmed or exited some shorts well and others not so much……Since initiating the CRM May Put Fly below, the stock had a massive run to make new all time highs only to settle back into little base the stock has been in for a few weeks. With the stock at $154.70 or less than 2% higher than where I entered the position, I am going to sell the fly at 1.80 for a .38 loss.
While I liked the risk reward of the premium out-lay to the potential profit, but at this point I have expected the stock to start working towards my long high strike and 3 weeks later it is a bit higher which will make it harder to break-even in a shorter period of time.
Original Post March 28th, 2012: “Cloudy the Future is” With the Stock Nearing All Time Highs
CRM is all the rage among tech investors, the cloud is all the rage among tech companies and CRM’s stock (trading within a few % of last years all time highs) acts like it is going to be taken out. The real problem with that thought though is there are very few companies that could pay the sort of premium for this $21billion market cap, and with the company’s current valuation, it would be massively dilutive to any acquirers earnings.
When the company reported their fiscal Q4 on Feb 23rd, the stock reacted very favorably to what appeared to be a beat, but in truth had just hit the top end of their previously lowered guidance. Some analysts on the street argued that the qtr was low quality as it had benefited from some inorganic growth and accounting changes.
I guess the real driver of the 9% move following the print and the 15% move in total since had to do with the upside guidance the company gave:
– guided to FQ113 revenue $673 M -$678 M and PF EPS of $0.33
to $0.34. Consensus was $663M and $0.36
-they raised FY13 revenue guidance to $2.92B- $2.95B vs
consensus of $2.91B
MY VIEW: As a bit of a contrarian I want to fade this sort of price action and this silly valuation of about 95x this years earnings…..stock trades like it is going to be taken out and I don’t think it will. If there are any signs of slowing growth when the company reports their Fiscal Q1 earnings, that should fall on May 18th (a day before May expiration) I think there is a very good chance that the stock fills in a portion of the last earnings gap and somewhere near the 200 day moving average at the low end of the gap.
I want to use a defined risk, low premium, low risk high reward structure to isolate these levels…..[caption id="attachment_10097" align="aligncenter" width="300" caption="1 YR CRM chart from Bloomberg"][/caption]
TRADE: CRM $152.50 Bought the May 145/130/115 Put Fly for 2.18
-Bought 1 May 145 Put for 6.19
-Sold 2 May 130 Puts for a total of 5.10 (2.55 each)
-Bought 1 May 115 Put for 1.09
Break-Even on May Expiration:
Profits btwn 142.82 and 130 make up to 12.82, max gain of 12.82 at 130, and payout trails off btwn 130 and 117.18.
Losses of up to 2.18 btwn 142.82 and 145 and btwn 117.18 and 115.00, with max loss of 2.18 below 115 and above 145.00
RATIONALE: Short interests sits above 10%, I think you want to be careful short names like this on an outright basis, and obviously while I would be surprised if the company were taken out (would have to be at least a $25billion deal), it is not out of the question. SO I want to play for a disappointment to improving sentiment on a stock that is priced for perfection, but I want to define my risk. ALso I like the almost 7 to 1 payout of the Fly.