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CrowdStrike Holdings (CRWD) is a favorite of stock analysts. They are continuing to raise their price targets. After all, it's expected to generate large amounts of free cash flow. Shorting OTM puts is a good play here.
CRWD closed at $292.24, up over $50 per share and +20% since its recent low of $242.25 on Sept. 11. I discussed how cheap it was in my Sept. 15 article, “CrowdStrike Stock is a Favorite of Contrarians, Value and Short-Put Investors.”
I showed how CrowdStrike could be worth at least $325.73 per share based on its 30% free cash flow (FCF) margins and using a 1.80% FCF yield metric. Since then analysts have also been raising their price targets close to mine.
Higher Price Targets
For example, Yahoo! Finance reports that the average of 42 sell-side analysts is now $325.14 per share, up from $322.27 three weeks ago. Similarly, AnaChart shows that 41 analysts have an average price target of $333.92, up from $303.16 on Sept. 15. That represents an upside of almost 15% from Friday's closing price.
Moreover, AnaChart's site shows that some analysts with good track records have significantly higher price targets. The table below shows that 3 analysts have $345 to $360 per share targets.
Note that each of these analysts have previously met their price targets at high levels. For example, Alex Henderson of Needham has had 81.5% success in meeting his price targets on this stock. His performance score is also very high as calculated by AnaChart. Note that he raised his target price from $350 to $360 11 days ago. That represents almost 23% upside from Friday's close.
The bottom line is the CRWD stock may still be undervalued despite its recent surge. One way to play this is to short out-of-the-money (OTM) puts in nearby expiry periods.
Shorting OTM Puts Works with CRWD Stock
For example, three weeks ago I suggested selling short the $240 put option strike price expiring this Friday, Oct. 4, three weeks away. At the time, this strike price was over 7% below the stock price of $259.13, but the premium was still high at $3.10 on the bid side.
In other words, short-put investors could earn 1.29% over the next 3 weeks. In addition, even if CRWD stock fell, the effective breakeven buy-in price would be $240-$3.10, or $236.90 which was 8.6% below the spot price.
As it turns out the stock rose to $292.44, so there was no obligation to buy the shares at $240. Moreover, investors holding CRWD stock made the best of both worlds. They gained the 12.85% gain in the stock price over that period, plus the 1.29% short-put yield, for a total return of over 14.14%.
So it makes sense to repeat this short-put trade, especially if the investor already owns shares in CRWD stock.
For example, look at the 3-week away expiration options chain for Oct. 25. It shows that the $275.00 strike price puts, which are over 5% below Friday's closing price of $292.24, have a bid-side price of $3.95 per put option contract. That represents a healthy short-put yield of 1.436% over 3 weeks (i.e., $3.95/$275.00).
In other words, an investor who secures $27,500 with their brokerage firm can make $395.00 by entering an order to “Sell to Open” 1 put contract at the $275.00 strike price for Oct. 25 expiration.
That also lowers the breakeven price, if CRWD falls to $275.00 on or before Oct. 25, to $271.05 ($275.00-$3.95). That is 7.25% below Friday's close, providing good downside protection.
Note that investors who want more downside protection can short the $265 strike price and make $202 for $26,500 secured. That still produces an immediate yield of 0.762% over the next 3 weeks.
The bottom line is that the investor can make between 1.436% and 0.762% through a mixture of short-put yield out-of-the-money (OTM) puts. That is an average of about 1.1% over three weeks, or 4.4% over 12 weeks if these plays can be repeated 4 times in a quarter.
Moreover, given the higher target prices for CRWD stock, existing shareholders can add to their overall return. The worst that will happen is that the investor will have to buy more shares at the put option strike price. That could result in an unrealized loss, at least for a period until or if the stock rises to its target price.
On the date of publication, Mark R. Hake, CFA 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.
