As its ticker symbol implies, Salesforce.com (CRM) provides cloud solutions for customer relationship management needs. CRM reported earnings in late August that blew away expectations on both the top and bottom lines. The report was met by the usual round of target price increases that reached as high as $340 (CRM closed at $260 on Friday).
The stock gapped higher after the report and extended as much as 5.5% higher the next day, eventually closing with a 2.5% gain. But the shares then sagged, joining the rest of the market in the early-September swoon. In fact, CRM fell more than 8% from its post-earnings high.
But the shares appeared to find a bottom last week, thanks to the support of the 50-day moving average. Since turning higher in May, the 50-day has supported pullbacks in July and August. CRM has been stepping higher since a low in early March, putting in a series of higher highs and lows in a rally that has covered nearly 30%. This trade is relying on this trendline support holding for the next six weeks, as the short 250 put of our credit spread is just below the 50-day.
If you agree that CRM will stay above the 50-day moving average (blue line in chart), consider the following trade that relies on the stock remaining above 250 (red line in chart) through expiration in six weeks.
Buy to Open CRM 29Oct 245 put
Sell to Open CRM 29Oct 250 put (CRM211029P250) for a credit of $1.10 (selling a vertical)
This credit is $0.02 less than the mid-point of the option spread when CRM was trading at $260. Unless the stock rallies quickly from here, you should be able to get close to this amount. Your commission on this trade will be only $1.30 per spread. Each spread would then yield $108.70. This trade reduces your buying power by $500 and makes your net investment $391.30 ($500 – $108.70). If CRM closes above $250 on October 29, both options will expire worthless and your return on the spread would be 27% ($108.70 / $391.30).