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Box, Inc. (NYSE: BOX ) reported earnings last night and Wall Street did not like what it saw. The knee-jerk reaction was to sell BOX stock down 6% on the headline. It's now off the lows but, clearly, investors are displeased.
The story is the same, BOX management met expectations but offered muted guidance going forward. These days investors want to see stronger forward prospects. I think traders have this wrong.
The reason most management teams are not eager to guide higher is that markets are near or at all-time-highs. What's more, we have a slew of negative headlines swinging above our heads.
The U.S. is threatening tariff wars against China and Europe. We are also renegotiating NAFTA Trade Agreement. Then there's the spectre of rising interest rates. So there are reasons to worry and if management wants to be cautious by not adding to the zealousness then it is a good thing. It shows that they are cautious and managing risk and expectations.
Fundamentally, BOX is too young to analyze from the traditional price-earnings perspective, so we are left looking at its fundamental potential. Our world is fast become more dependent on technology than ever and at an alarming rate. The cloud now touches so many aspects of our daily routines. Box Inc. is positioned to benefit from that going forward.
They were relatively early adopters of the cloud but they do have stiff competition. Amazon.com Inc (NASDAQ: AMZN ) and Alphabet Inc (NASDAQ: GOOGL ) just to name two. There are other smaller players like Dropbox, Inc (NASDAQ: DBX ).
I tried BOX years ago, but I've since dropped them. I find that what Google offers me is too easy and free. So I guess if everyone was like me then BOX is toast. Not so. I do think that there will be enough demand on the segment that everyone will prosper.
However, I am not ready to risk $27 a share buying the stock. Instead, I use BOX options so I can set a moat around my risk. To put it in plain simple English, I believe more in downside support of BOX stock than the upside potential for the medium term.
The trick is to pick proper levels into which I sell downside risk and then let time do the work for me. I don't even need a rally to profit. I merely need the stock to stay above my puts and I retain my maximum gains.
Luckily for BOX bulls, the stock came into its earnings up 30% this year. So some downside was to be expected. The price action on this dip is unfolding accordingly without expectations of normal patterns.
So for those who have been tracking the chart, they are not surprised by the levels we are seeing today. It was one of the potential scenarios. It could have some more downside potential if the technical target were to play out perfectly. And that's yet another reason why using options makes more sense than buying shares outright.
The area around $24 has been pivotal for months so I expect it to be forward support. It will take a much more serious headline than tepid guidance to cause a bigger correction in 2018.
The Bet: Sell BOX DEC $19 naked put. This is a bullish trade where I collect 90 cents to open. Here I have an 80% theoretical chance of success. But if BOX stock falls below my strike price, I accrue losses.
Selling naked puts carries big risk especially for a stock as frothy as BOX. For those who want to mitigate it, they can sell a spread instead.
The Alternate Bet: Sell BOX Dec $19/$17 credit put spread. The spread has the same odds but would deliver 20% yield on risk. Neither trade requires a rally to profit. In fact the stock can fall an additional 24% and I could still retain maximum gains.
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Nicolas Chahine is the managing director of SellSpreads.com . As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits .
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