Salesforce is consolidating recent gains and currently sits in IBD Leaderboard.
According to the IBD Stock Checkup, CRM stock is ranked No. 14 in its industry group and has a Composite Rating of 97, an EPS Rating of 98 and a Relative Strength Rating of 92.
Today, we're looking at a bull put spread. As a reminder, a bull put spread is a defined-risk strategy, so you always know the worst-case scenario in advance.
This type of trade will profit if CRM stock trades sideways or higher and even sometimes if it trades slightly lower.
With CRM stock trading around 217, if we use the July 21 expiration, we can sell a 205 put and buy a 200 put for around $0.80.
Selling this spread would generate roughly $80 in premium. The maximum risk is $420.
Maximum Return 19%
If the spread expires worthless that would mean a 19% return in one month, provided CRM stock is above 205 at expiration.
The maximum loss would occur if CRM stock closes below 200 on July 21. That would see the premium seller lose $420 on the trade.
The break-even point for the trade is 204.20. That's calculated as 205 less the $0.80 option premium per contract.
I would set a stop loss if CRM drops below 205. Otherwise, another good rule of thumb is to limit the loss to the amount of premium received. In this case, that would be $80.
Guarding Against Big Losses
Sticking to this stop loss level will help avoid large losses if the trade goes south.
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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 Twitter at @OptiontradinIQ.
