<p>Who knew that Zoom (NASDAQ: ZM) would be a force at a time when investors were abandoning stocks? It turns out when pandemics and quarantine become the fear of the day; Video communications are the ultimate security industry. With ZM shares flourishing and an earnings report threatening, it is now a perfect time to decide how to trade the street’s new hot stock in its announcement.
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Zoom has been traded as an inverse ETF or government bonds. For example, the 10-day correlation coefficient between Zoom and the S&P 500 is -0.72. Last Friday, the S&P 500 went lower but ripped higher to close with a massive bullish headlight. Meanwhile, ZM gaped louder and crashed lower all day and ended with a big pooping light.
Shareholders must be happy with Zoom’s relative strength last week. Friday’s jump marked a record high and pushed their annual profits to 63%. At the same time, the Nasdaq (which is probably a better benchmark to compare with the S&P 500) moved its 2020 performance far into losing territory.
From a technical perspective, ZM bearings project on all cylinders. It is above any major moving average, has accumulated in droves and has remained completely unharmed in the face of coronavirus hysteria.
Source: thinkorswim® platform from TD Ameritrade
But with revenues planned for March 4, we are about to see if the company’s sales growth has been sufficient to justify such a significant increase since the December report. Will reality be rosy enough to support such high expectations?
I have no idea. The market really predicts improvements, and I would much rather bet with the audience than against them right now. Instead of buying the stock directly, however, I prefer to use the increased volatility to my advantage by building a trade with high probability options.
ZM stock volatility is HUGE
We have seen a huge increase in demand for alternatives along with the rise of Zoom. The willingness to pay for derivatives is understandable for two reasons.
First, ZM is an incredibly volatile stock right now. The average true range (ATR) is around $ 8, indicating that it has gone around 8% on average per day. This is the highest reading since ZM went public last year.
Secondly, there will be a results announcement that will increase the range of potential results in the coming weeks. Implied volatility shot as high as 110% on Friday but has since declined to 88%.
If you lean on revenue, bull put spreads are not a bad way to go.
The Trade: Sell April 80 $ / $ 75 bull put spread for 60 cents.
Consider it a bet that Zoom is above $ 80 at the end. The maximum reward is 60 cents and the maximum risk is $ 4.40.
At the time of writing, Tyler Craig held no positions in any of the above securities. Click here for a free trial of the best trading community on the planet and Tyler’s current home.