December 13, 2023
I haven’t written for a while because the credits weren’t close enough to my target entry prices. This week, however, the credit is higher than when I sent the trade to our premium subscribers, meaning your maximum profit is now greater.
Before I get to the trade, I want to let you know that we’re winding up another solid year for our Terry’s Tips portfolios. Our QQQ portfolio is up more than 70% for the year, while our MSFT portfolio is up more than 55%.
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I look forward to having you join in the fun and profits! Now on to the trade …
Sorry for the lousy title. I couldn’t come up with anything clever for today’s stock, which, quite frankly, I’ve never heard of. That’s OK, though, because I know little to nothing about cloud-based software for the health sciences, which is what Veeva Systems (VEEV) provides. I don’t really care about what a company does, or if I’ve ever heard of them. I do know that the stock has liquid options with ample open interest and reasonably narrow bid/ask spreads, which is a must for our trades.
I also know that VEEV reported earnings after the close on Wednesday. The company slightly beat both the profit and revenue forecasts but pulled back revenue guidance for the coming quarter. It’s worth noting that a month ago, VEEV plunged nearly 15% after lowering revenue guidance on lower-than-expected services sales.
The earnings news apparently spooked the market, which drove VEEV more than 7% lower on Thursday before the stock recovered to close down 3%. Analysts also were edgy, as evidenced by a few price target reductions (there was one increase). But the consensus target price remains more than 20% above Friday’s close, which seems overly optimistic. Analysts are also firmly in the “buy” camp for VEEV, which also seems misplaced for a stock that has underperformed the market this year.
On the charts, VEEV has made little progress after the November plunge. In fact, the shares are down 23% from their 2023 high hit in September. This slide has been efficiently guided by the 20-day moving average, which has allowed only a handful of closes above it since mid-October. The technical level I’m watching is 180, a point of staunch resistance the stock has failed to close above since the November plummet. That is also the sight of the short call strike of our credit spread. Note that the 20-day sits between 180 and the current stock price, adding another layer of resistance.
If you agree that the stock will continue to respect the monthlong resistance level and stick close to its 20-day moving average (blue line), consider the following credit spread trade that relies on VEEV staying below $180 (red line) through expiration in 6 weeks:
Buy to Open the VEEV 19 Jan 185 call (VEEV240119C185)
Sell to Open the VEEV 19 Jan 180 call (VEEV240119C180) for a credit of $1.25 (selling a vertical)
This credit is $0.12 less than the mid-point price of the spread at Friday’s $172.71 close. Unless VEEV falls sharply at the open on Monday, you should be able to get close to that price.
The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $123.70. This trade reduces your buying power by $500, making your net investment $376.30 per spread ($500 – $123.70). If VEEV closes below $180 on Jan 19, the options will expire worthless and your return on the spread would be 33% ($123.70/$376.30).
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