Before we dive too deep into this week’s idea I have decided to sell our PureStorage (PSTG) stock position, which will leave us without a stock or option positions, as the stock has not been participating in the recent market rally. This could prove to be a mistake, but I would prefer to lock in our small profit, while at the same time raise some cash for upcoming trades.
Moving on …
The market added to recent gains last week, as the S&P 500 had its best week since July. The S&P 500 rose 1.8%, the Dow climbed 1.6%, and the Nasdaq added 2.2%.
The rally came on the back of better-than-expected earnings from several well-known stocks. The big banks dominated the earnings calendar and the sector’s pandemic-era trading boom fueled the continued bullishness.
Cabot Profit Booster 197
Before we dive too deep into this week’s idea I have decided to sell our PureStorage (PSTG) stock position, which will leave us without a stock or option positions, as the stock has not been participating in the recent market rally. This could prove to be a mistake, but I would prefer to lock in our small profit, while at the same time raise some cash for upcoming trades.
Moving on …
The market added to recent gains last week, as the S&P 500 had its best week since July. The S&P 500 rose 1.8%, the Dow climbed 1.6%, and the Nasdaq added 2.2%.
The rally came on the back of better-than-expected earnings from several well-known stocks. The big banks dominated the earnings calendar and the sector’s pandemic-era trading boom fueled the continued bullishness.
But encouraging earnings reports weren’t the only thing to keep the bulls happy.
Retail sales also came in above expectations as consumer sales increased 0.7% in September, surprising most economists who had predicted a decline.
For the moment, inflationary concerns, Fed tapering, debt-ceiling woes and numerous other bearish factors seem to be standing on the sidelines while earnings take center stage.
Quarterly earnings reports pick up again this week as some notable names are due to announce. Procter & Gamble (PG), Netflix (NFLX), United Airlines (UAL), Verizon (VZ), International Business Machines (IBM), Tesla (TSLA), Las Vegas Sands (LVS), and Intel (INTC) are just a few of the highlights on the docket this week.
October expiration ended with a bang and so far November expiration looks to offer us a few more nice returns. Recently, I decided to take a more conservative approach by selling in-the-money calls, and it has worked out well so far. As a result, I will continue to extend my approach this week by selling in-the-money calls on SaaS-based software provider Datadog (DDOG), which looks terrific but has earnings risk as the company will report results in early November.
The Stock – Datadog (DDOG)
Why the Strength
Datadog is a leading SaaS-based application performance management (APM) provider, whose real-time monitoring and analytics platform helps app developers solve problems faster while boosting customer service by helping firms make sense of increasingly complex data.
While SaaS companies have generally outperformed post-pandemic, Datadog has had an especially strong 2021 replete with revenue run rates in excess of $1 billion, plus cash flow that’s growing in the triple digits (all the more impressive when compared to most cash-burn intensive SaaS businesses).
The company has also been working to expand its addressable market, recently launching a cloud security service with partner Arctic Wolf. Indeed, the top brass believes that cybersecurity can be a much bigger part of its overall analytics platform and told analysts on a recent call that it sees a “very large market” for adding security to the platform’s development and operations functions.
On the financial front, Datadog significantly increased Q3 and full-year guidance and expects revenue of around $247 million along with per-share earnings between 5 and 6 cents. For full-year 2021, the top line is expected to be $941 million at the midpoint (up 6% from prior guidance) with the bottom line around 27 cents (up 93%). Additionally, a recent share price upgrade from a big firm has contributed to the strength (based on projected re-acceleration in software and IT spending during economic reopening).
Going forward, the total market for global cloud and workload security is expected to exceed $30 billion annually this year, and analysts see the top and bottom lines surging in the 40% range next year.
Technical Analysis
After a lengthy upside run last year, DDOG peaked at 120 in February before entering a Chinese water torture-type decline that shook out most of the weak hands over many months. Shares finally bottomed out at 70 in May, and DDOG has been steadily pushing higher ever since, with the Q2 report in August providing the juice for a breakout. The latest price highs were confirmed by new highs in the RP line, so we’re OK with taking a swing here or on dips. Stop—135
The Covered Call Trade
Buy Datadog (DDOG) Stock at 158, Sell to Open November 152.5 Strike Calls (exp. 11/19) for $12.00 or a Net Price of 146 or less
Static Return: $650 per covered call (4.45%)
Breakeven: 146
Covered Call Return (if assigned): $650 per covered call (4.45%)
Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.
However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 146 or less. (In this case 158 minus 12 = 146. Or another example is you could pay 159 for the stock and sell the call for 13, which also equals 146.)
Open Positions
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.
| Stock Name and Symbol | Price Bought | Current Stock Price | Stop | Option - Price of Call Sold | Current Option Price |
| PureStorage (PSTG) | 26.65 | 26.05 | 22.5 | October 27 -- $1.00 | |
| International Game Technology (IGT) | 28.10 | 29.29 | 22.5 | November 26 -- $3.50 | $4.00 |
| Builders FirstSource (BLDR) | 55.50 | 57.50 | 49.0 | November 55 -- $3.40 | $4.00 |
The next Cabot Profit Booster issue will be published on October 26, 2021.
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