The cloud-based applications software provider, Workday (WDAY) will report fiscal Q4 results tonight after the close. The options market is implying about a 6.5% one-day post-earnings move tomorrow in either direction, which is basically in line with the 4 qtr average one-day post-earnings move.
WDAY, up 24% on the year, and up nearly 70% from its November 2018 lows is making a new all-time high today, on what some technicians might call a runaway breakout over the last month:
Despite the stock’s gains, analysts remain fairly mixed on the stock with 21 Buy ratings, 13 Holds and 4 Sells, while short interest is down to about 7% of the float.
One reason for caution, despite the high-flying performance, is that the stock trades at about 12x expected fiscal 2020 sales growth of 26%, which is expected to decelerate from last year’s 31%, growth, down from the prior year’s 37% growth. While 26% is still very impressive revenue growth, with nearly 75% gross margins, it’s important to note that this is on a low single-digit revenue base. With the stock trading at current levels, it is discounting a lot of good news, and is clearly priced for perfection.
So what’s the trade?
If I were inclined to play for a retracement of some of the stock’s recent gains back towards the January 31st gap in the mid $170s (on competitors ServiceNow’s better than expected results) I might consider the following trade idea in March 15th expiration:
Bearish Trade Idea: WDAY ($199) Buy March 200 – 172.50 put spread for $7.50
-Buy to open 1 March 200 put for $8.50
-Sell to open 1 March 172.50 put at $1.00
Break-even on March 15th expiration:
Profits of up to 20 between 192.50 and 172.50 wth max gain of 20 at 172.50
Losses of up to 7.50 between 192.50 and 200 with max loss of 7.50 at 200 or higher
Rationale: this trade idea risks less than 4% of the stock price to make a two week bet into a potentially volatile event that the stock can decrease by 10%.
Or if I were inclined to do make a defined risk bullish bet I might consider just a one-day binary trade with calls… for instance:
Bullish Trade Idea: WDAY ($199) Buy March 1st weekly 200 – 220 call spread for $5
-Buy to open 1 March 1st 200 call for 5.50
-Sell to open 1 March 1st 220 call at 50 cents
Break-even on March 1st expiration (tomorrow’s close):
Profits of up to 15 between 205 and 220 with max gain of 15 at 220 or higher
Losses of up to 5 between 200 and 205
Rationale: this trade is very binary, risking 2.5% of the stock price to possibly make up to 7.5%. If you get the direction wrong tomorrow this trade will be a total loser by lunchtime…