Arista Networks saw a massive move Wednesday, rising 6.85% to an all-time high.
Arista specializes in cloud networking solutions for data centers and high-performance computing environments.
In the third quarter, the company reported a 20% year-over-year increase in sales, reaching $1.81 billion, and a 30% rise in earnings to 60 cents per share.
Investors who think Arista stock will continue to rally and don't want to risk significant capital can use long call options rather than buy the stock. 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 stock at a certain price (strike price) up until a certain date (expiration date).
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 Arista stock, he or she would have to invest around $12,900 at the current share price.
$3,100 Vs. $12,900
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.
Investors who buy one Arista 110-strike call option expiring on Sept. 19 would only need to invest around $3,100 rather than $12,900.
The break-even price for this call option is equal to the strike price plus the premium paid, which would make the break-even 141.
The most the trade can lose is the premium paid of $3,100, which would occur if Arista finished below 110 on Sept. 19.
However, if the 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.
Other Ways To Trade Arista Stock
For example, selling the Sept. 19, 160-strike call would reduce the trade cost by around $950 but would also limit the upside above 160.
A stop loss could be set if Arista stock drops 8% from the entry point.
According to the IBD Stock Checkup, Arista is ranked No. 1 in its industry group. It has a Composite Rating of 99, and EPS Rating of 98 and a Relative Strength Rating of 95.
Tuesday's Netflix earnings trade worked well and should expire worthless for a full profit.
Please 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
