DocuSign stock is the top-rated stock in IBD’s enterprise software group because of strong fundamentals and technicals.
DocuSign‘s (DOCU) Composite Rating and Earnings Per Share Rating are the highest possible at 99, giving it a spot in the IBD 50 index of leading growth stocks. The e-signature leader is also a Leaderboard stock. The stock was added to Leaderboard in early June when it gapped above its 200-day moving average after reporting strong earnings.
DocuSign Stock Option Trade
DocuSign stock on Tuesday broke out above resistance to a new high. Traders that expect this strength to continue could look at a bull put spread option trade.
To execute a bull put spread, an investor would sell an out-of-the-money put and then buy a further out-of-the-money put.
Selling the August 290 put and buying the 285 put would create a bull put spread.
This spread was trading for around $1.65 yesterday. That means a trader selling this spread would receive $165 in option premium and would have a maximum risk of $335.
That represents a 49.25% return on risk between now and Aug. 20 if DocuSign stock remains above 290.
If DocuSign stock closes below 285 on the expiration date the trade loses the full $335.
The break-even point for the bull put spread is 288.35 which is calculated as 290 less the $1.65 option premium per contract.
This bull put spread trade has a delta of 5 which means it is a similar exposure to owning 5 shares of DocuSign stock, although this exposure will change over time as the stock price moves.
In terms of a stop loss, if the spread increased in price from $1.65 to $3.30, I would consider closing early for a loss.
With earnings set for early September, this trade should have no earnings risk.
Remember options are risky. 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. Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
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