Update: Salesforce (CRM) – Cloud Formation

by CC May 30, 2018 12:14 pm • Trade Updates

Yesterday we previewed Salesforce’s (CRM) Q1 earnings release and detailed a couple of ways to play for a move higher (depending on conviction) as well as a bearish/hedge put spread. The stock is higher today, not by much, so the bearish idea is obviously not working but the two bullish trade ideas got the direction right, but are and I wanted to check back in on both to see which turned out to be better. Here was what we said yesterday:

If I were Bullish on the stock, I might consider two trades, depending on conviction level:

Trade Idea #1 – Weekly Call Spread: If I thought the company would issue and beat and raise and the stock would rally inline with the implied move I might consider:

CRM ($126.30) Buy June 1st weekly 127 – 134 call spread for $2

-Buy to open 1 June 1st weekly 127 call for 2.50

-Sell to open 1 June 1st weekly 134 call at 50 cents

This trade idea is binary, get the direction wrong this week and a total loser.

OR Trade Idea #2, if you thought a beat and raise might be in the stock given its recent bounce and wanted to play for a consolation this week post results I might consider the following call calendar:

Trade Idea: CRM ($126.30) Buy June 1st weekly / Aug 130 call calendar for 3.50

-Sell to open 1 June 1st weekly 130 call at 1.30

-Buy to open 1 Aug 130 call for 4.80

Let’s first look at the weekly call spread, the slightly more aggressive of the two that looked for a move in line with the bullish expectations of a move. With CRM now 130.50 the June1st 127/134 call spread is worth about 3.40 versus the 2.00 initially at risk. That’s not terrible and is trading about at its intrinsic value. As far as trade management, this expires on Friday and will be essentially be trading in line with stock over the next two days. Any profit taking decisions should be made as if it was stock.

The second trade was more mildly bullish and sets up for more upside after Friday. With the stock 130.50 the June1st/August regular 130 call calendar is worth about 5.00 versus the initial 3.50 at risk. That’s obviously less of a return than the weekly call spread but the set-up is the chance that it could make more money following the event if the stock goes higher over the Summer. For trade management purposes the June1st 130 short calls need to be closed and rolled before the expire as any close above 130 on Friday and they become short stock. One interesting roll is to buy to close the June calls for 1.30 and sell to open something higher and farther out. The two calls to roll to that look interesting to me are the July 135 calls at around 2.60, or the August 130 calls at about 2.30. In both cases you reduce risk by at least 1.00, and can make more if the stock goes higher.

The roll to July doesn’t allow for a ton of room to the upside, but even if the stock went quickly to 135 or above the trade is long deltas and it would make a nice profit, but you might be forced to then roll again. The roll to July works best if the stock stays where it is or moves slightly higher.

The roll to the August 140’s is more aggressive for those that want room for the stock to run to the upside, even if the risk is about the same. It does not leave the additional optionality that continuing the trade as a calendar does with the July roll.

In either case more can be made than the current profits, it’s simply a matter of conviction of what the stock does next.