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In the old days, companies needed to beat the operating performance metrics and Wall Street would reward them for that. That's not enough these days - just look at Box (NYSE: BOX ) stock.
Investors expect management not only needs to beat revenues and earnings, but they also demand that they guide higher than expected. Otherwise, they sell the stock on the headline.
This is what happened yet again to shares of Box last night and this afternoon. The cloud company beat on the top and bottom lines … but the third-quarter guidance was soft.
Box's stock is falling 9% on the headline, but therein lies the opportunity!
We are now in an age where everything runs on the cloud. And there are a handful of companies like BOX that are trying to establish themselves as leaders in the space.
They are following in the footsteps of Salesforce (NYSE: CRM ) who popularized the idea of using the cloud for business, and Amazon (NASDAQ: AMZN ) who actually built the cloud with its AWS division.
BOX was an early adopter of the cloud but they do have fierce competition. AMZN and Alphabet (NASDAQ: GOOGL ) just to name two giants. Dropbox (NASDAQ: DBX ) is not a threat since they concentrate on the consumer, unlike Box, which targets businesses.
Dropbox recently reported earnings and it, too, was punished hard on the headline.
It's not yet a certainty that BOX will be a dominant player, but for as hot as the industry has been, I'm willing to bet that it can carve a niche for itself.
Usually I am a fundamental investor and I require value against which I can risk my money, but in this case, today's trade is a pure bet on price action. BOX stock has proven support, and I bet that it will hold through 2018.
Today, I sell downside risk into what others fear from this earnings headline. Management was most likely being cautious looking forward into the third quarter. The company even stated that it remains optimistic to meet its 2021 revenue run rate targets.
Technically BOX has a pivot support zone around $23.40 per share which should lend support on the way down. But if it fails there could be a retest of $21. Although this is not a forecast, it is a scenario to consider. Conversely, above $27 per share, the stock can attract buyers to set new highs.
But instead of betting on upside opium, I prefer selling downside risk again proven support levels. This would be an opportunity to create income without any out-of-pocket expenses as long as price for BOX stock remains above my level of risk.
Worst-case scenario, I end up owning Box shares at a deep discount even from this morning's lows.
The point is that there is room for each of these early adopters to flourish in this new age where we need the cloud for almost every aspect of our lives. Small hiccups for like this are normal along the way.
In fact, this is a rinse-and-repeat from Box last negative earnings reaction to their earnings. So I come into this with profits in my pocket.
The Bet: Sell BOX Jan $20 naked put. This is a bullish trade where I collect $1 to open. Here I have an 80% theoretical chance of success. But if Box's stock price falls below my strike, I accrue losses below $19.
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 Jan $20/$18 credit put spread. The spread has the same odds but would deliver 18% yield on risk. Neither trade requires a rally to profit. In fact, Box shares can fall an additional 17% 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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