Salesforce is due to report earnings on Wednesday after the closing bell. The options market is pricing in a 7.8% move in either direction.
In five of the last six earnings reports, Salesforce stock stayed above the lower part of its expected range. Here's a bull put spread option trade if you believe CRM stock can do it again. It might seem a little familiar because we did a similar trade with Nvidia last week that worked out well.
Setting Up The Option Trade On Salesforce Stock
First, we'll start with the expected range from earnings. We'll take the at-the-money put and call for the nearest expiration after earnings. That expiration is March 1. This morning the two premiums added together traded around 23.35, or 7.8% of the stock price at 297. This gives you a range in which Salesforce stock is likely to trade. Of course there are no guarantees and it doesn't tell you direction.
Now that we know the expected range, let's find a bull put spread that has the short strike roughly 7.8% below the stock price.
Remember with a bull put spread, we put on a bullish trade by selling a put and collecting the premium. In order to reduce the risk, we buy a put at a lower strike price in case the trade doesn't go in our expected direction.
For Salesforce, we can sell the 275 put expiring on March 1 for roughly 2.95 per share. That's just about at our 23.35 expected range below the 297 price for CRM stock this morning. Then we'll buy the 270 put with the same expiration for roughly 1.95. That creates the bull put spread.
For this trade, you collect roughly $1 in net premium. Multiplying by 100 shares gives you a $100 credit per contract. This is also the maximum profit if Salesforce stock finishes above 275 at expiration.
For the maximum loss, you take the premium received and subtract it from the five-point difference in the strikes. Again multiplying by 100 shares, gives you a maximum loss of $400. You will lose the full $400 if Salesforce stock closes below 270 at expiration. One of the great features of the bull put spread is you know your worst-case scenario ahead of time so you can manage risk better.
Taking the max profit divided by the max loss gives you a 25% return on risk in just a few days' time.
The break-even point for the bull put spread is 274 which is calculated as the short strike at 275 less the 1.00 option premium per contract.
Managing The Trade
There is little room for adjustment with short-term trades such as this, held over earnings. They either work or they don't.
According to the IBD Stock Checkup, Salesforce is ranked No. 6 in its industry group. It has a Composite Rating of 98, an EPS Rating of 98 and a Relative Strength Rating of 93. Not bad. And remember, Salesforce stock doesn't have to go up for this trade to win, it just has to stay above that lower expected range at 270.
While a 25% return in a few days would be nice, the possibility of losing 100% is also very real. As such, this style of trade is only for traders with a high-risk tolerance.
If CRM stock ends below 270, long-term investors could consider taking ownership of the 100 shares and selling covered calls against it.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
