CrowdStrike is highly rated and has been exhibiting improving relative strength.
CrowdStrike was the IBD Stock of the Day on May 14 and also is one of the five best stocks to buy.
The company reports earnings June 4, and today let's look at a strategy called a pre-earnings diagonal call spread on CrowdStrike stock.
A diagonal call spread involves selling a near-dated call and buying a longer-dated, further out-of-the-money call.
Little Downside Risk, Plus Nice Profit Zone
The idea is to have little to no risk on downside and a nice profit zone on the upside.
Let's take a look.
We could look at selling the June 7, 400 call for around $3.90 and buying the June 21, 410 call for around $4.10. The trade would cost $20, which is also the maximum risk on the downside.
The maximum risk on the upside is the difference between the strike prices times 100 plus the premium paid. So in this case, $1,020 would be the max risk. This would occur above a stock price of 410.
The worst-case scenario for the trade is a sharp rally in the first few days of the trade. A slow rally would be OK, provided CrowdStrike stock doesn't get above 400.
The maximum profit can only be estimated but is around $1,300.
The trade starts with a perfectly delta neutral, but that could switch to positive delta after a few days if the stock hasn't rallied too much.
Exit Strategy For CrowdStrike Stock
I would set a stop loss if CrowdStrike broke above 400, and I would also close the trade before the earnings announcement.
According to the IBD Stock Checkup, CrowdStrike stock is ranked No. 1 in its industry group. It has a Composite Rating of 98, an EPS Rating of 99 and a Relative Strength Rating of 97.
Diagonal spreads are more of an advanced strategy and not recommended for beginners.
The DraftKings trade discussed May 18 hit a stop loss Wednesday and needed to be closed.
It's important to 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
