Palo Alto Networks) got attention as the IBD Stock of the Day back in March. Plus, the chart of PANW stock continues to look good, especially as the stock is set to join the S&P 500.
PANW stock also is currently trading above its 50-day line and the 200-day moving average. As seen by the relative strength line, the cybersecurity software giant has shown strong relative strength in the past five weeks.
Meanwhile, the 21-day exponential moving average just crossed over the 50-day moving average. This technical action could also provide positive momentum.
Implied volatility is near a 12-month low. So, it's better to look at debit spreads with growth stock leaders such as Palo Alto Networks rather than credit spreads.
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PANW Stock: How To Set UP A Bull Call Spread
A bull call spread is a bullish debit spread that is created through buying a call and then selling a further out-of-the-money call.
Selling the further out-of-the-money call reduces the cost of the trade but also limits the upside.
Going out to the September expiration in PANW stock, a 230-strike call option was trading around $11 on Friday. The 240 call floated around $7.55.
Buying the 230 call and selling the 240 call would create a bull call spread. The trade cost would be $345 for a block of 100 shares (difference in the two above option prices multiplied by 100), and the maximum potential profit would be $655 (difference in strike prices, multiplied by 100 less the premium paid).
A bull call spread is a risk-defined strategy. So if PANW stock closes below 230 on Sept. 15, the most the trade could lose is the roughly $345 premium paid.
Potential gains are also capped above 240, so no matter how high PANW stock might go, the most the trade could profit is $655.
The break-even price for the trade? It's equal to the long call strike plus the premium, which in this case would equal 233.45.
In terms of trade management, if the stock dropped below 203, I would consider closing early for a loss.
Solid Ratings
According to IBD Stock Checkup, PANW stock ranks No. 1 in its group and has a Composite Rating of 99 out of a best-possible 99, an EPS Rating of 98 and a Relative Strength Rating of 91.
Palo Alto Networks is due to report earnings in late August, so this trade in PANW stock would have earnings risk if held until then.
Please remember that options are risky, and investors can lose 100% of their investment.
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
