Arista Networks stock continues to look strong and was added to the IBD 50 last week.
According to the IBD Stock Checkup, ANET stock is ranked number 2 in its group and has a Composite Rating of 94, and EPS Rating of 98 and a Relative Strength Rating of 89.
Investors who think ANET stock will continue to rally and don't want to risk significant capital can use long call options rather than buy the stock outright. This can be a good way to protect precious capital in these volatile markets.
A call option is a contract between a buyer and seller. The contract gives the buyer the right to purchase a certain stock at a certain price (the strike price) up until a certain date (the expiration date).
Option Trading With Leverage
One of the benefits of call options is that they provide leverage. (This can be both a good and a bad thing.)
Assuming an investor wanted to buy 100 shares of ANET stock, he or she would have to invest around $16,200 at the current price.
Instead, the investor could gain a similar exposure using a fraction of the capital by buying a call option. One call option gives the investor exposure to 100 shares.
If an investor were to buy one ANET 160-strike call option expiring on Dec. 15, the amount needed to invest would be around $1,870, rather than $16,200.
The break-even price for this call option is equal to the strike price plus the premium paid. That would make the break-even price 178.70.
The most the trade can lose is the premium paid of $1,870, which would occur if ANET finished below 160 on Dec. 15.
Option Trading: Call Has Unlimited Upside
However, if Arista stock shoots higher, the upside is unlimited.
Using options in this way can be a great way to gain exposure to a stock without risking as much capital as would be required to buy the stock outright.
Savvy traders can further reduce the risk by selling an out-of-the-money call, turning the trade into a bull call spread.
For example, selling the Dec. 15, 180 call would reduce the trade cost by around $980, but would also limit the upside above 180.
A stop loss could be set if Arista drops 8% from the entry point.
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Please remember that option trading is 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
