Cloudflare (NET), a cloud platform and cybersecurity services company, reported earnings after the bell on Thursday that beat analyst estimates for revenue, earnings and guidance. In response, several analysts raised their price targets to a range between $88 and $105 (the stock closed at $85.95 on Friday).
Despite the positive earnings and target price increases, the stock dropped nearly 6%. But it stayed above its rising 50-day moving average, a trendline that has supported the stock throughout a yearlong rally that has seen the stock more than quadruple. With the positive earnings, price target increases and technical support in place, the rally should continue.
If you agree NET’s rally will continue, consider the following trade that relies on the stock remaining above $85 through expiration in five weeks.
Buy to Open NET 19MAR21 80 Puts (NET210319P80)
Sell to Open NET 19MAR21 85 Puts (NET210319P85) for a credit of $2.35 (selling a vertical)
This credit is $0.05 less than the mid-point of the option spread when NET was trading near $86. 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 $233.70. This trade reduces your buying power by $500 and makes your investment $266.30 ($500 – $233.70). If NET closes above $85 on March 19, both options will expire worthless, and your return on the spread would be 88% ($233.70 / $266.30), or 915% annualized.
As with all investments, you should only make option trades with money that you can truly afford to lose.