Shares of Salesforce have been slumping, recently hitting a 52-week low before rebounding slightly. Second-quarter earnings reported late last month didn't ease concerns.
Even though its $1.19 EPS beat analyst estimates, the company slashed its revenue guidance. A macro environment of rising interest rates and lower growth are principal concerns driving shares lower. The stock is part of the Dow Jones Industrial Average.
Investors who expect further weakness in Salesforce can use a bear call spread to express this view.
To construct a bear call spread, simultaneously sell a call and buy a call at a higher strike price with the same expiration. For Salesforce stock, investors can consider selling a 160 call while buying a 170 call, both with an Oct. 21 expiration.
This trade currently provides a credit of $4.50, which equates to a maximum gain of $450 for a block of 100 shares should Salesforce trade below 160 on expiration.
The maximum loss is the width of the strikes minus the credit received. In this case, the calculation is 10-4.50 x 100 = $550. Investors will realize a maximum loss if Salesforce trades above 170 on expiration. The break-even price for this trade is 164.50.
Manage Risk With Bearish Spreads
A bear call spread is an attractive trade for investors who believe there will be further weakness or muted trading in Salesforce stock. This trade will work particularly well if shares of Salesforce face resistance around the current 160 level, which previously acted as support.
On inception, this bear call spread has a negative delta of .20, which is the equivalent of shorting 20 shares of Salesforce. Nevertheless, unlike shorting shares, the risk of a bear call spread is defined. That makes it an attractive way to express a bearish directional view.
Salesforce currently has an IBD Composite Rating of 43 and a Relative Strength Rating of only 18. Shares are trading down more than 36% year to date, well below both the 21-day exponential moving average and 50-day moving average.
