Update – Palo Alto High (PANW)

by CC June 1, 2017 9:55 am • Trade Updates

Yesterday we previewed Palo Alto Networks (PANW) earnings and detailed a bullish/stock alternative trade with defined risk. The trade was slightly more complicated than the average earnings trade, but it is one we’re a big fan of on a risk/reward basis for a stock that can move the way PANW does. And boy did it today. First, let’s recap the trade idea:

Bullish / Stock Alternative:

PANW ($119) Sell the June 2nd weekly 118/115 put spread, to Buy the July 125/150 call spread risk reversal for 2.70

It starts with selling a put spread near term:

Sell the June 2nd 118/115 put spread at 1.30

  • Sell 1 June2nd 118 put at 4.90
  • Buy 1 June2nd 115 put for 3.60

and then buying a call spread farther out in time.

Buy the July 125/150 call spread for $4

  • Buy 1 July 125 call for 4.40
  • Sell 1 July 150 call at .40

This looks more complicated than it is. Essentially it was selling a (defined risk) put spread this week (risking 1.70 to make 1.30) and using that credit of the call spread sale to help pay for a wide call spread in July.

With the stock now $139, up $20, the short put spread is worthless like we hoped, and the July call spread is well in the money. The trade is now worth $13.50 mark to market.

As far as trade management, the short put spread is worthless and can expire that way (or covered for a penny). But now there’s risk/reward in the July call spread we need to consider. The call spread itself is trading about parity with its intrinsic value, as the 125 and 150 line each have about $2 in extrinsic value, canceling each other out. So decay is not an issue here. The story is deltas. So for those happy with this move and the profits now, take it off and do a nice victory dance. For those looking to stay in the game it probably makes sense to close the existing trade and look towards a calendar on the 150 line, or a just out of the money call spread where you can take most of the profits off the table here but remain in the game at a low cost.