Have the Salesforce Pay You

Salesforce.com (ticker: $CRM) reports earnings after the bell today. Going into the report the charts on both a daily and weekly timeframe are set up for it to go higher. Let’s start with the weekly chart.

The weekly timeframe shows that it is building a classic bull flag after a massive $130 run higher. The volume is declining as expected in this pattern, as the Moving Average Convergence Divergence (MACD) indicator moves back to zero. The Relative Strength Index (RSI) seems to be finding support at the mid line, remaining bullish. These indicators suggest the flag could break soon and the bias is higher. A first target on a break over 140 would be 160 from adding the flag width to the break out and ultimately the continuation after the flag to 270. But let’s not get a head of ourselves.

The daily chart above shows a blow up of that flag. The support at 130 is clearly shown and the hammer printed Tuesday was confirmed higher Wednesday back over the 50 and 100 day Simple Moving Averages (SMA). With a MACD that is about to cross higher and a RSI that is rising the bias is to the upside. Resistance would come first at 140 and then through the flag at 145 and 151.26. But with earnings tonight you need to also be prepared for a potential ‘mark to market’ pullback. If that occurs then support comes at 120.48 below the 130 level and then 115.

So with all this knowledge how best to play the earnings? How about checking a calendar. Below is the options chain for CRM for May and June from Wednesday’s close. It shows a roughly $10 move priced into the earnings release with the May options expiring the next day. It also shows that the implied volatility of the May options is more than double the 55% of the June options at 130%. With the bias to the upside from the charts, one trade idea is to buy the May/June 145/140 Call Calendar Spread. This is done by selling the May 145 Call for 1.14 and buying the June 140 Call for 5.05 or a net debit of 4.36. This trade is looking for a close Friday below 145 but above the 140 channel to make money. If it closes at 145 the short call expires worthless and the long June call should increase by over $4 to something over $9.00. If it falls the short call is worthless and the long call should still be worth over $2.50, so there is some downside risk.

Not comfortable for a downside surprise? Then perhaps try a May/June 130 Put Calendar Spread for a debit of 2.65. If the stock falls the full $10 to 125 then the short put would be worth $5 but the long June put would increase to at least 7.40 based on the 37.7 delta, a paper loss of 20 cents but with further downside potential.

You could combine the two but then the breakeven would make the trade unattractive on a very short term basis. So which way do prefer to play it? Let me know in the comments.

As always you can see details of individual charts and more on my StockTwits feed and on chartly.)

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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