Setting Up a Bullish Spread in Palo Alto Networks, Inc. (PANW NYSE)

Palo Alto Networks, Inc. PANW NYSE is an IT services and consulting company with a focus on cyber security. The company’s stock is currently trading around $139.90 in a 52 week range of $111.09-$194.73. The stock has been massively underperforming the market this year with shares falling more than 20% year to date. Despite the stocks weakness this year it still appears to be setting up well for a long position into earnings. PANW NYSE will release their most recent quarterly earnings on Tuesday after the market closes. To confirm a long setup in PANW we will examine the stocks historical movement record on and around earnings day, the current expected move, and the stocks technical set up on the daily bar.

First we will look at the stocks historical performance record around earnings. We are concerned with two time frames and will use the performance record across these timeframes to develop a bullish or bearish bias in PANW NYSE. We can see that on earnings day the stock has rallied 11 of the past 12 quarters with an average move of 7.37%. From earnings day to the nearest options expiry the stock has rallied 9 of the past 12 quarters with an average move of 9.58%. We can clearly see that the stock tends to rally on earnings. This does not guarantee a rally this quarter but it does give us a bullish bias throughout the rest of the analysis. Next, we will calculate the expected movement through next week’s weekly options expiry and use it to develop price targets.

To determine the expected movement we will use the price of the weekly at the money straddle. We want to use the shortest available options expiry that still contains the catalyst event as this will help us to isolate the expectations for earnings. The at the money straddle is simply the price of the at the money puts added to the price of the at the money calls. Below is the current market for the Sep 2nd Weekly PANW NYSEat the money straddle.

PANW NYSE

Here we can see that the straddle is marking at a midmarket price of $12.25. This represents an expectation for a move of 8.76% higher or lower by next Friday’s close. This is right in line with the stocks historical movement averages and shows us that there is not likely an opportunity to sell premium in PANW NYSE ahead of earnings. With this calculated expected movement we can develop an upside and downside target for next weeks close.

Upside Target = $139.90 + $12.25 = $152.15
Downside Target = $139.90 – $12.25 = $127.65

With these targets in mind we will look at the daily chart and see if it confirms the bullish bias I historical movement. We are looking for bullish price action into the earnings event. Below Is the chart.

PANW NYSE

Here we can see that the stock has broken the Ichimoku Cloud to the upside into earnings and is now trading firmly in bullish territory. The upside target does not represent a new high for the stock but lines up with old resistance. This makes it a very attainable target. With a bullish chart setup and bullish historical movement bias we will look to get long PANW NYSE.

Possible Trade: Buying the PANW NYSE Sep 2nd Weekly 150-152.5 Call Spreads for $0.60
Risk: $60 per 1 lot
Reward: $190 per 1 lot
Breakeven: $150.60

This trade has a great risk vs. reward and sets up with extra upside should the stock move in line with its historical movement averages. This trade also has a limited level of risk and a great reward potential. This is the method that trades should be using to set up an evaluate trades ahead of earnings reports.

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