Arista Networks (ANET) has been holding up well and is breaking out to a new 52-week high.
Arista Networks, Inc. is engaged in providing cloud networking solutions for data centers and cloud computing environments.
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The company offers 10/25/40/50/100 Gigabit Ethernet switches and routers optimized for next generation data center networks.
Arista uses multiple silicon architectures across its products. At the core of the company's cloud networking solutions is the Linux-based Extensible Operating System (EOS), which was architected to be fully programmable and highly modular.
EOS supports leading cloud and virtualization solutions, including Microsoft System Center, OpenStack and other cloud management frameworks.
The company co-authored the Virtual Extensible LAN (VXLAN) protocol specification with VMware and was the first to demonstrate VXLAN integration. Moreover, it has now expanded VXLAN routing and integration.
The Barchart Technical Opinion rating is a 100% Buy with a Strongest short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
Rather than just buying the stock, savvy traders can use the options market to find smart ways to trade Arista Networks stock without risking too much capital.
Today, we’re going to look at a couple of bull call spread trades on Arista Networks stock.
Here are the parameters for finding some bull call spread trade ideas on ANET.
Symbol equals ANET Probability of Profit above 40% Moneyness -10% to 0% Days to expiration 30 to 150Here are the results of that particular screener:
Let’s analyze some of these ideas.
Bull Call Spread 1: December 18th 220 – $240 Bull Call Spread
As a reminder, A bull call spread is a bullish defined risk option strategy. To execute a bull call spread an investor would buy a call option and then sell a further out-of-the-money call.
Let’s use the first line item as an example. This bull call spread trade involves buying the December 18th expiry $220 strike call and selling the $240 strike call.
Buying this spread costs around $7.90 or $790 per contract. That is also the maximum possible loss on the trade. The maximum potential gain can be calculated by taking the spread width, less the premium paid and multiplying by 100. That give us:
20 – 7.90 x 100 = $1,210.
If we take the maximum gain divided by the maximum loss, we see the trade has a return potential of 153.17%.
The probability of profit is 40.3%, although this is just an estimate and does not indicate the probability of achieving the maximum profit.
The spread will achieve the maximum profit if ANET closes above $240 on December 18. The maximum loss will occur if ANET closes below $220 on December 18, which would see the trader lose the $790 premium on the trade.
The breakeven point for the Bull Call Spread is $227.90 which is calculated as $220 plus the $7.90 option premium per contract.
Bull Call Spread 2: November 20th $220 – $230 Bull call Spread
The next example is on the third line and involves buying the $220 November 20th call and selling the $230 call.
Buying this spread costs around $4.60 or $460 per contract. That is also the maximum possible loss on the trade. The maximum potential gain can be calculated by taking the spread width, less the premium paid and multiplying by 100. That give us:
10 – 4.60 x 100 = $540.
If we take the maximum gain divided by the maximum loss, we see the trade has a return potential of 117.39%.
The probability of profit is 41.3%, although this is just an estimate and does not indicate the probability of achieving the maximum profit.
Mitigating Risk
With any option trade, it’s important to have a plan in place on how you will manage the trade if it moves against you.
For a bull call spread, setting a stop loss of 50% of the premium paid is a good idea. In the first ANET example above, that would be a loss of around $395. For the second example, the stop loss would be around $240.
Traders may also consider a stop loss if ANET breaks below key support at $200.
Please remember that options are risky, and investors can lose 100% of their investment. This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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