Arista Networks is looking strong and sitting above the 21-, 50- and 200-day moving averages.
By using a combination of option strategies, we could potentially buy the stock for a significant discount or achieve a healthy profit if the stock trades sideways.
Here's the trade:
Sell to open the Arista Oct. 18 put with a strike price of 350, which traded around $9.25 late Wednesday.
Then, add a bear call spread: Sell to open the Arista Oct. 18 call with a strike price of 400, which traded around $3.10.
Buy to open the Oct. 18 call with a strike price of 410, which was trading around $1.90.
The sold put brings in around $925 in option premium, and the bear call spread adds another $120 in premium. In total, the combination of the two trades generates $1,045 in premium.
The position starts with a delta of 29, meaning it is roughly equivalent to owing 29 shares of Arista Networks.
This figure will change as the trade progresses.
Scenarios For Arista Stock Trade
Let's work through a couple of scenarios of how this trade could look at expiration on Oct. 18.
- If Arista stock trades sideways and finishes between 350 and 400, the sold put and bear call spread will both expire worthless. The total profit will be equal to the premium received of $1,045.
- If Arista falls below 350 at expiration, we will be assigned on the sold put and will be forced to buy 100 shares at 350. However, our net cost basis will be 339.55, thanks to the $1,045 in option premium received. That is 6.15% below Wednesday's closing price.
- If Arista rallies above 400, the bear call spread will suffer a full loss of $1,000, but this will be fully offset by the $1,045 premium received, leaving the trade with a small gain of $45.
Arista Leads Its Industry Group
According to the IBD Stock Checkup, Arista is ranked No. 1 in its industry group. It a Composite Rating of 96, an EPS Rating of 98 and a Relative Strength Rating of 93.
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
