Trade Alert: Trying A Winning Set-Up Again

Another "value investing" options trade.

A Value Investing Options Trade

In a trade alert last month, I mentioned we were going to do something a bit different, bet on a beaten-down stock with a strong valuation:

An Options Trade On A Former High-Flyer

Most of the stocks we place bullish options bets on here are ones with bullish charts, but occasionally, we take flyers on ones with strong fundamentals that have been beaten down. Today’s options trade is on a beaten down stock.

This one was a high-flying growth stock a few years ago, and while the hype around it has long since faded, its fundamentals have gotten stronger. When it released earnings in May, it beat on both top and bottom lines; nevertheless, the stock has dropped about 10% since then. After that drop, it now has a Chartmill Valuation Rating of 7 (on a scale of 0 to 10). It also has a Piotroski F-Score of 8 (on a scale of 0 to 9), indicating strong financial health and a lack of dilution.

Our bet on this one is that it bounces after it posts its earnings in August.

That stock was Zoom Video Communications, Inc. (ZM 0.00%↑), and our trade was a vertical spread expiring on September 20th, buying the $60 strike calls and selling the $65 strike calls for a net debit of $1.60.

The maximum gain with this sort of spread is the spread itself, in this case $5, but I wrote there that I was going to open a GTC (“Good ‘Till Closed”) order to exit at a net credit of $4, since I wasn’t confident ZM would hit $65.

Zoom Reports Earnings

Flash forward to this week. Zoom reported an earnings beat after the close on Wednesday. It was only up modestly in the aftermarket session though, closing below $63. After seeing that, I lowered the exit price on my GTC order from $4 to $3.40.

Zoom closed at $68.04 the next day though. Had I kept my $4 price, I would have exited for a 150% gain. Instead I had a 113% gain.

@dpinsenLeft a little money on the table with this Zoom trade. Could have gotten out at $4 or $4.50 for a 150% or 181% gain. $ZM

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The song I used in the TikTok above about that trade includes the line, “I’m doing it wrong”. That seemed fitting in light of the money I left on the table.

Going To The Same Well Again

Despite leaving a bit of money on the table here, 113% is a nice gain. So it seemed logical to go to the same well again, and see if we can find another winner. Specifically, what I screened for was a stock that:

• Had options traded on it (obviously)

• Beat on both top and bottom lines last time it reported earnings.

• Declined since that earnings release.

• Was oversold, with a Relative Strength Index (RSI) below 30.

• Had a Chartmill Valuation Rating of at least 7.

• Had a Piotroski F-Score of 8 or better.

I found a stock that met all those criteria, though it’s in a different industry than Zoom, and I placed an options trade on it. Details below the paywall.

And if you’d rather limit your risk now, you can download the Portfolio Armor hedging app here, or by aiming your iPhone camera at the QR code below.

Our Bullish Options Trade