Arista Networks (ANET) is currently showing above average volatility with an IV Percentile of 86% and an IV Rank of 47%.
ANET rates as a Strong Buy according to 14 analysts with 1 Moderate Buy ratings and 6 Hold ratings.
Arista Networks, Inc. is engaged in providing cloud networking solutions for data centers and cloud computing environments.
The company offers 10/25/40/50/100 Gigabit Ethernet switches and routers optimized for next generation data center networks.
Arista uses multiple silicon architectures across its products. At the core of the company's cloud networking solutions is the Linux-based Extensible Operating System (EOS), which was architected to be fully programmable and highly modular.
EOS supports leading cloud and virtualization solutions, including Microsoft System Center, OpenStack and other cloud management frameworks.
The company co-authored the Virtual Extensible LAN (VXLAN) protocol specification with VMware and was the first to demonstrate VXLAN integration.
Moreover, it has now expanded VXLAN routing and integration.
Today, we’re going to look at a short strangle trade due to the high IV percentile.
A short strangle aims to profit from a drop in implied volatility, with the stock staying within an expected range.
When implied volatility is high, the wider the expected range becomes.
The maximum profit for a short strangle is limited to the premium received while the maximum potential loss is unlimited. For this reason, the strategy is not suitable for beginners.
ANET SHORT STRANGLE
Traders that think ANET stock might remain stable over the next few weeks could look at a short strangle.
As a reminder, a short strangle is a combination of an out-of-the-money short put and an out-of-the-money short call.
The idea with the trade is to profit from time decay while expecting that the stock will not move too much in either direction.
For ANET stock, an October 20 put with a strike price of $180 could be sold for around $2.40.
Then the short call, placed at the 200 strike, could be sold yesterday for around $1.50.
In total, the short strangle will generate around $3.90 per contract or $390 of premium.
The profit zone ranges between $176.10 and $203.90. This can be calculated by taking the short strikes and adding or subtracting the premium received.
If price action stabilizes, then short strangles will work well. However, if ANET stock makes a bigger than expected move, the trade will suffer losses.
Conclusion And Risk Management
One way to set a stop loss for a short strangle is based on the premium received. In this case, we received $390, so we could set a stop loss equal to the premium received, or a loss of around $390.
Another way to manage the trade is to set a point on the chart where the trade will be adjusted or closed. That could be around $180 on the downside and $200 on the upside.
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.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
