What a market! Tech, construction and select consumer-related companies continue to help lead stocks higher. So, let's consider a short iron condor spread in Salesforce. CRM stock is outperforming the general indexes, rising as much as 20% since Jan. 1.
CRM stock also holds a bright 92 Relative Strength Rating on a scale of 1 to 99.
The short iron condor spread is a neutral position and estimates that prices will sit in a range. This action would allow us to capture erosion in price from the passage of time to deliver steady gains.
Why consider CRM stock?
Here's another reason. It looks like we are mirroring the recent past of its chart formations. CRM stock has shown that big moves will digest before taking off again.
After a small fade into tight moving averages, the traders took the Nasdaq into new highs as the other indexes held their high lows. At this juncture the S&P 500 is sitting near year-end target highs. And it's only March 1.
Naturally our leaders, including CRM stock, may likely take a breath before moving further. On top of that, if the FOMC, or the interest-rate setting committee of the Federal Reserve, takes a neutral stance on politics, it won't make a move on rates anywhere into the November elections unless absolutely forced to do so.
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CRM Stock Today
The economic calendar, meanwhile, is another busy one next week. So we could also consider taking the position after the market starts chewing on the expected data.
Amid the overall bullish context of the market, we wait for dips to take directional moves long. And as we all know, don't buy a downward trending stock while expecting a bullish turnaround. Focus on leaders, not laggards.
The general outlook on Salesforce remains positive as this recap post shares with us.
The Trade Setup
Construct the short iron condor in CRM stock as follows:
- Sell to open 1 CRM May 17-expiration call with a 340 strike price
- Buy to open 1 CRM May 17 360 call
- Sell to open 1 CRM May 17 280 put
- Buy to open 1 CRM May 17 260 put
Total credit comes out to $5.56 per set of contracts, based on recent trading. The break-even cost for this trade in CRM stock? It sits near two levels: 345.56 on the high side and 274.44 on the low side.
The ideal strategy result gives us two choices to exit this options trade in CRM stock. One, sell the short iron condor spread once it carries an acceptable profit, which is around 50% for me. And two, sell the short iron condor spread once it hits your loss threshold.
Stock hunting using fundamental and price strength within the IBD methodology is where I firmly plant myself under the backdrop of the current economic backdrop. I use technical analysis to find ideal buying opportunities in conjunction with the tools for strength seen on IBD.
CRM Stock: Understanding The Iron Condor
The goal of taking the short iron condor which delivers a credit to us is to allow time decay to work for us as we potentially watch the price action sit still while time decay (theta) increases our gains over time.
Options sellers are positioned to win in two ways — the stock does nothing, or the stock moves within the ranges relative to the strategy, so we use this concept to minimize the risk of market exposure.
Chart-wise, the monthly resistance zone sits near 320, just above highs using a retracement to a Fibonacci-style technical level. Price support sits near 280. These two levels give us room for prices to move around.
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Consider These Scenarios
With January-quarter earnings behind us, we now expect CRM stock to trade in a range before breaking out, which is the primary reason that I am suggesting a trade that uses time as the reason we hold the position.
- CRM stock grinds higher or lower into our risk thresholds. We exit the trade and cut losses.
- Shares stay in a range and we gain slowly over time.
- CRM stock grinds higher or lower into our profit thresholds. We exit the trade and preserve a gain.
As with all trades, consider what you like about holding the position in the first place and consider your risk carefully.
Be patient and allow price action to move around a range of your stops.
Anne-Marie Baiynd is a 20-year veteran trader of stocks, options and futures and is the author of "The Trading Book: A Complete Solution to Mastering Technical Systems and Trading Psychology." She holds no positions in the investments she writes about for IBD. You can find her on Twitter and Stocktwits at @AnneMarieTrades
