The price of Zoom stock has tumbled since their disappointing earnings release, with the stock currently sitting around 80 having been as high as 120 in early August.
When a quality company has a big drop like this, I like to use a strategy called a diagonal put spread.
This option strategy is an advanced strategy because it utilizes options over different expiration periods and different strike prices.
The strategy involves selling an out-of-the-money put for a near term expiry and then buying a put for around the same price using a later expiry.
The idea with the trade is that the stock might fall a little bit more, but should stay above the short strike price.
Let’s look at an example using Zoom (ZM).
Zoom Diagonal Put Spread Example
The trade I’m looking at is selling a September 16 put with a strike price of 70 and buying a September 30 put with a strike price of 65.
As of yesterday’s close, the September 16 put could be sold for around 0.80 and the September 30 put could be bought for 1.00.
The net cost on the trade would be $20 and that is the most the trade could lose on the upside.
The risk on the trade is on the downside with a potential maximum loss of $520. This is calculated by taking the difference in the spread (5) multiplied by 100 and adding in the cost of the trade (20).
The maximum potential gain is around $175 which would occur if ZM closes right at 70 on September 16.
The trade has a nice profit zone in between 67.50 and 80.
Aiming for a return of around 10-15% makes sense and I would set a similar stop loss.
The worst-case scenario is a sharp drop in ZM stock early in the trade. For this reason, if the stock drops below 70 in the next few days, I would also consider closing the trade early to minimize losses.
The initial trade set up has a delta of 5 meaning the position is roughly equivalent to owning 5 share of ZM stock. Note that this delta number can change significantly as the stock starts to move.
Below is the payoff graph with the blue line representing the profit or loss at expiration and the purple line being the trade as of today.
This is how the trade could look in around ten days’ time.
So, provided ZM stock stays above 70 in the next ten days, the trade should to ok. As the trade requires the stock to not drop too much, this would not be an appropriate strategy for bearish traders.
Zoom Company Details
The Barchart Technical Opinion rating is a 88% Sell with a Strengthening short term outlook on maintaining the current direction. Long term indicators fully support a continuation of the trend. The market is in highly oversold territory. Beware of a trend reversal.
Zoom Video Communications' cloud-native unified communications platform, which combines video, audio, phone, screen sharing and chat functionalities, makes remote-working and collaboration easy. Zoom Video's solutions include Zoom Meetings, Zoom Rooms, Zoom Phone, Zoom Chat, Zoom Conference Room Connector, Zoom Video Webinars, Zoom for Developers and Zoom App Marketplace. Zoom Video's flagship solution Zoom Meetings provides high-definition video, voice, chat and content sharing across mobile devices, desktops, laptops, telephones and conference room systems. Zoom Meetings integrate with tools, such as Atlassian, Dropbox, Google, LinkedIn, Microsoft, Salesforce and Slack. Moreover, Zoom Phone is an enterprise cloud phone system that provides inbound and outbound calling via its support for native connectivity to the public switched telephone network (PSTN).
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.
*Disclaimer: On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in some of the securities mentioned in this article. All information and data in this article is solely for informational purposes. Data as of after-hours, August 31, 2022.
More Stock Market News from Barchart
/A%20concept%20image%20of%20space_%20Image%20by%20Canities%20via%20Shutterstock_.jpg)
/A%20concept%20image%20of%20a%20flying%20car_%20Image%20by%20Phonlamai%20Photo%20via%20Shutterstock_.jpg)
