The cloud-based applications software provider, Workday (WDAY) will report fiscal Q1 results tonight after the close. The options market is implying about a 8% one-day post earnings move which is shy to its 4 qtr average one-day post-earnings move of about 7.5%, the stock declined 8% the day following their Q4 report in late February and declined 12.5% the day following their Q3 report in early December. With the stock at $100, the June 2nd weekly (tomorrow expiration) 100 straddle (the call premium + the put premium) is offered at $7.50, so if you bought that and thus the implied earnings move you would need a rally above $107.50 or a decline below $92.50 to make money by tomorrow’s close.
Since closing 2016 on a nasty note, at 10-month lows, down more than 10% on the year, the stock has made a fairly dramatic V reversal, up a whopping 51% on the year, within 1% from its52-week highs made last week. On a near-term basis, the stock has support back near its recent breakout level to new2 52 week highs at $93.50, very near the implied move:
Taking a long-term view back to its 2012 IPO, the all-time high of $116.50 in early 2014 is the only real technical resistance at this point:
From where I sit, WDAY is a real headscratcher, trading at 10x expected f2018 sales, that are expected to grow to $2 billion at 29% yoy, a slight deceleration from fy2017’s 35% sales growth, but meaningful from fy2016’s 48% growth. Still very impressive, but then you have to consider the paltry 37 cents in expected fy2018 eps is nearly a $2 loss of a GAAP basis. If a good bit of this year’s run in the stock is predicated on takeover spec, I would not hold your breath as a deal would need to come near or above $25 billion, a number that would likely be very dilutive for any who could actually acquire this company.
Wall Street analysts are mixed at best on the stock, with 13 buy ratings, 24 Holds and 3 Sells, with an average 12-month price target at $94 below where the stock is trading. Short interest is at 11% of the float.
I would not buy this stock with your money, to say I am skeptical of the stock’s rally and its valuation is an understatement, but I might have also said that at $80 and then again at $90 😉
Long holders might consider stock replacement strategies to better define risk into a potentially volatile event, or consider collars. While those looking to play for a move back to the low $90s, in line with the implied move might consider short dated put spreads.
Defined risk long:
WDAY ($100) Buy June 2nd 100 / 107 call spread for $2.35
-Buy 1 June 2nd 100 call for 3.55
-Sell 1 June 2nd 107 call at 1.20
Break-Even on June 2nd expiration:
Profits: up to 4.65 between 102.35 and 107, max gain of 2.35 above 107
Losses: up to 2.35 between 100 and 102.35, max loss of 2.35 below 100
Rationale: this trade has a 1 to 2 risk reward for one day. If you are wrong on direction than the trade will be a total loss, if you are right on the direction you will only need a 2.35% rally to break-even. As usual, you need to get a lot of things right on long premium event trades to merely break-even, direction, timing and magnitude of the move. So it is a matter of conviction and risking what you are willing to lose.
Hedge – Collar
vs 100 shares long of WDAY ($100) Buy June 16th 109 / 92 collar for even money
-Sell to open 1 June 16th 109 call at $1.25
-Buy to open 1 June 16th 92 put for $1.25
Break-Even on June 16th expiration:
Profits of stock up to 109, gains capped there.
Losses of stock from 100 down to 92, but losses capped there
Rationale: the stock’s year to date gains and valuation make it susceptible to a greater than expected gap to a downside on a miss and guide down, while a lot of good news may be in the stock. Disaster hedges make sense, and if the stock were to go through the short call strike on the upside one could always cover the short call for a loss to keep the long position intact. This trade overlay makes sense for holders willing to give up some potential upside for defined risk to the downside into a potentially volatile event.
Buy the June 2nd WDAY ($100) 100 / 90 put spread for $3
-Buy to open 1 June 2nd 100 put for $3.75
-Sell to open 1 June 2nd 90 put at 75 cents
Break-Even on June 2nd (tomorrow) Expiration:
Profits: up to 7 between 97 and 90 with max gain of 7 at 90 or below on tomorrow’s close.
Losses: up to 3 between 97 and 100 with max loss of 3 above 100
Rationale: I’ll offer a very similar rationale to the long alternative above, this trade has a slightly better 2 to 1 risk reward for one day. If you are wrong on direction then the trade will be a total loss, if you are right on the direction you will only need a 3% decline tomorrow to break-even. As usual, you need to get a lot of things right on long premium event trades to merely break-even, direction and magnitude of the move. So it is a matter of conviction and risking what you are willing to lose.