CrowdStrike is showing extremely high implied volatility in the lead-up to the earnings announcement next Tuesday.
There is also significant volatility skew: Short-term options show much higher implied volatility than long-term options.
One way to take advantage of this skew is via a diagonal put spread.
This option strategy is an advanced strategy because it utilizes options over different expiration periods and different strike prices.
Let's look at an example:
Traders could sell a March 8 put with a strike price of 270 and buy a March 22 put with a strike price of 265. (An earlier version of this story incorrectly said a 370 put.)
Maximum Risk On Upside $50
As of Wednesday's close, the March 8 put could be sold for around $3.40 and the March 22 put could be bought for $3.90.
The net cost of the trade would be $50. That's also the maximum risk on the upside.
The risk on the trade is on the downside, with a potential maximum loss of $550. This is calculated by taking the difference in the spread (5) multiplied by 100 and adding in the cost of the trade (50).
The maximum potential gain is around $1,200. That would occur if CrowdStrike closes right at 270 on March 8.
The trade has a large profit zone in between 250 and 340.
Trade Works Well If CrowdStrike Stays In Range
If CRWD stock stays between these values, the trade should do well. The main risk is if the stock drops below 250.
The initial trade set up has a delta of -1. That means the position is roughly neutral to start with. Note that this delta number can change significantly as the stock starts to move.
According to the IBD Stock Checkup, CRWD stock is ranked No. 1 in its industry group. It has a Composite Rating of 99, an EPS Rating of 99 and a Relative Strength Rating of 97.
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
