Before we dive into this week’s idea, let’s clean up some of our January positions, with the headliner being things all worked out well.
First off, AAL closed above our 18 strike on Friday which means we walked away with a profit of $90 per covered call, or a yield of 5.26%.
Next up is SOFI, which closed below the strike on Friday which means the call we sold for $1.15 expired worthless, leaving us with our stock position today. Fortunately, SOFI is now trading at $17.80, and today we are going to sell this stock position, which will lock in our profit on the call and the stock.
Finally, BIRK closed just below the 60 strike on Friday which means the call we sold for $2 expired worthless, leaving us with our stock position today. Let’s sell our BIRK stock today, and walk away with our profits on the combined position.
Moving on …
The market rose nicely last week as the bond market worries eased. By week’s end the S&P 500 and Nasdaq had rallied 2.9%, and the Dow had gained 3.8%.
The Stock – Cloudflare (NET)
Cloudflare is a cloud services provider with a heavy presence on the operations side of the internet. It’s a content delivery network, or CDN, providing the architecture, network ability and back-end technology to keep websites humming for all but the very largest web players (which usually run their own CDNs).
Cloudflare maintains operations in more than 200 cities worldwide because physical closeness to its clients’ users speeds up loading pages and streaming media. Other work is much more sophisticated, like developing cloud infrastructure and blocking some 165 billion cyber threats each day to its 221,000 paying customers.
Most of the revenue comes from a much smaller group of clients that spend $100,000 or more with Cloudflare each year; that cohort grew 27% last quarter to 3,265, contributing 65% of revenue. The business has long been a 25%-plus revenue grower, and now it’s AI that promises to be a fresh source of expansion for Cloudflare.
Its Worker AI system allows developers to use their own code to run machine learning models on the Cloudflare network. The access is especially desired because it enables scale deployment of AI inference, which is the exposure of AI-trained models to new, unseen data to improve the models’ programming. Cloudflare’s global network – built to speed up the internet – makes the AI product desirable worldwide, since high-powered GPU resources are near every potential customer.
Expectations are that Q4 results, to be reported after the market closes February 6, will show revenue up 25% to about $452 million with net income per share hitting $0.18, up from $0.15 a year earlier, both of which are likely conservative. That Q4 growth rate is about what Wall Street expects for 2025, seeing sales hitting $2.1 billion for this year, though earnings are expected to grow at a slower clip due to higher expected spending to expand AI services. All told, this remains a solid, steady growth idea.
Technical Analysis
NET had a decent rally from its bear market low into early 2024, spiking as high as 116 in February, but shares have been etching a huge consolidation ever since—the stock fell a big 43% from that spike higher, bottomed out for a while and then began to rally back in October. NET made it back to its old highs in December and, after a few weeks of rest, is now toying with multi-year peaks. Stop – 107
The Covered Call Trade
Buy Cloudflare (NET) Stock at 120, Sell to Open February 120 Strike Calls (exp.2/21) for $7, or a Net Price of 113 or less
Static Return: $700 per covered call (6.19%)
Breakeven: 113
Covered Call Return (if assigned): $700 per covered call (6.19%)
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 113 or less. (In this case 120 minus 7 = 113. Or another example is you could pay 121 for the stock and sell the call for 8, which also equals 113)
For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …
Open Positions
| Stock Name and Symbol | Price Bought | Current Stock Price | Stop | Option - Price of Call Sold | Current Option Price |
| American Airlines (AAL) | 18 | 18.8 | 14.4 | January 18 -- $0.90 | |
| SoFi Technologies (SOFI) | 16.4 | 17.8 | 13.3 | January 17 -- $1.15 | |
| Birkenstock (BIRK) | 60.2 | 58.2 | 52.5 | January 60 -- $2 | |
| Rubrik (RBRK) | 65 | 71.5 | 56 | February 70 -- $3 | $5 |
| Robinhood (HOOD) | 42.75 | 50.5 | 33.5 | February 42 -- $4.75 | $9.75 |
The next Cabot Profit Booster issue will be published on January 28, 2025.
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