Find Out: A Bearish Trading Opportunity In A Cloud-Based Software Company

| September 9, 2019 | 0 Comments

optionsAtlassian Corporation (TEAM) was one of the hottest company’s in terms of its growth and stock price.  But now, it looks like it’s losing steam and breaking down, setting it up for a bearish trade.

Atlassian Corporation Plc – Class A Ordinary Shares (TEAM) is a cloud-based software company which provides a variety of tools for content creation and project management. It has enjoyed great growth tapping into a tailwind of high growth sector and using the SaaS model which has helped propel the shares up some 70% this year alone.

But, it competes with companies such as Salesforce (CRM) and Service Now (NOW) to which it seems to be losing market share and crimping margins.

The last earnings report, at the end of July, showed top-line growth had slowed to 36% from 42% the year before and is expected to drop to 28% YoY over the next two quarters.  Bottom line EPS is expected to grow just 15%.

This is the second consecutive quarter of a deceleration.  With the stock priced for perfection, there is little room for disappointment or missteps in execution at this stage of the company’s development.

Management has stated it is consciously making the strategic choice to prioritize growth and market expansion over short-term profit. As a result, it invests heavily in R&D (48% of revenue) for product development and sales automation, all aimed at achieving high growth and rapid market expansion.

But, if the investments are starting to show less returns, the stock is vulnerable to a revaluation which would mean a sharp decline.

The chart has broken a long-term uptrend and now has broken below support around the $133-$135 level.

Atlassian

A good way to play this is using options is through a bear call spread.  This involves selling a near the money call and buying a further out of the money call for a net credit.

The attraction of this strategy is it can profit not only if the stock goes down but also simply if it does not go up.

For example, one can sell the 133 strike call and buy the 136 call with the Sept. 21 expiration for a net credit of $1.70.

As long as shares remain below $133, you keep the $1.70 of the premium collected.  Using a spread also limits your loss to just a maximum of $2.30.

Here is the risk/reward graph:

While the market is hungry for growth and cloud-based management tools have been hot, Atlassian Corporation Plc – Class A Ordinary Shares (TEAM) is losing steam and this offers a good way to make a bearish play.

Note: This article originally appeared at Option Sensei on September 4, 2019.

 

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Category: Options Trading Strategy

About the Author ()

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.

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