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ANET Bull Put Spread Could Return 18%
Arista Networks (ANET) continues to be one of the strongest stocks in the market.
The Barchart Technical Opinion rating is a 100% Buy with a Strengthening short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
The market is approaching overbought territory. Be watchful of a trend reversal.
ANET rates as a Strong Buy according to 15 analysts with 2 Moderate Buy ratings, 5 Hold ratings and 1 Strong Sell rating.
Arista Networks, Inc. is engaged in providing cloud networking solutions for data centers and cloud computing environments.
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.
Today, we’re going to look at a bull put spread trade.
A bull put spread is a bullish trade that also can benefit from a drop in implied volatility.
The maximum profit for a bull put spread is limited to the premium received while the maximum potential loss is also capped. To calculate the maximum loss, take the difference in the strike prices of the long and short options, and subtract the premium received.
ANET BULL PUT SPREAD
Implied volatility is currently sitting at 36.01% which gives ANET and IV Percentile of 43% and an IV Rank of 20.52%.
Arista Networks’s expected move between now and October 18 is around 8.3% in either direction. On the downside, that would put ANET stock at around $330.
In other words, the options market is expecting ANET stock to stay above $330 between now and October 18.
To create a bull put spread, we sell an out-of-the-money put and then by a put further out-of-the-money.
Selling the October 18 put with a strike price of $330 and buying the $320 put would create a bull put spread.
This spread was trading yesterday for around $1.50. That means a trader selling this spread would receive $150 in option premium and would have a maximum risk of $850.
That represents an 18% return on risk between now and October 18 if ANET stock remains above $330.
If ANET stock closes below $320 on the expiration date the trade loses the full $850.
The breakeven point for the bull put spread is $328.50 which is calculated as $330 less the $1.50 option premium per contract.
Arista Networks is set to report earnings in late-October, so this trade should have no earnings risk if held to expiration.
Conclusion And Risk Management
One way to set a stop loss for a bull put spread is based on the premium received. In this case, we received $150, so we could set a stop loss equal to the premium received, or a loss of around $150.
Another way to manage the trade is to set a point on the chart where the trade will be adjusted or closed. That could be around $340.
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.
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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.
