Highly encouraging Covid-19 vaccine news was released on Monday, and the market reacted in dramatic fashion. For example, popular brick-and-mortar REITs that had been beaten down by the virus (such as SPG and WELL) gained (+27% and +21%, respectively), while social distancing tech stocks (such as ZM and DOCU) lost (-17% and -15%, respectively). However, some names have continued to sell off when they should not have, and we highlight one in particular in this report for an attractive income-generating options trade opportunity. We already own some shares of this name (we purchased them recently), but if you don’t own it (or you wouldn’t mind picking up more shares), you may want to consider this trade opportunity because it generates very high upfront premium income for you to keep, and it gives you a shot at owning shares of this attractive business at an even lower price.
Worth mentioning, upfront premium income available is higher when volatility in a name is higher, as it is right now for this stock.
Fastly, Inc (FSLY)
The compaNy we are referring to is Fastly. We recently completed a detailed report on Fastly here. If you don’t know, Fastly offers an “Edge Cloud Platform” that allows developers to place their applications on the edge of the internet, closer to customers. It’s basically a platform that allows for improved digital experiences in terms of speed, security and reliability. Fastly, has been growing rapidly and has a large total addressable market to continue growing rapidly for many years.
As noted in the report linked above, Fastly shares fell after news of challenges with its largest client, TikTok (~10-12% of total revenues), and the shares fell even further on yesterdays vaccination news (again, as tech stocks sold off and virus-sensitive stocks rallied.
Fastly Share Price:
This share price volatility (as you can see in the chart above), has created a very attractive trading opportunity
The Trade:
Sell Put Options on FSLY with a strike price of $63 (~10% out of the money, it currently trades at ~$69), and an expiration date of November 20, 2020, and for a premium of at least $1.00 (this comes out to approximately 1.6% of extra income in less than 2-weeks!… and a much larger amount on an annualized basis. This trade not only generates attractive upfront premium income for us now, but if gives us a chance at buying shares of this attractive long-term company at a dramatically lower price ($63—the strike price) if the market price falls below $63 and the shares get put to us before this option contract expires in a matter of days. And we get to keep the upfront premium income no matter what.
Your Opportunity:
We believe this is an attractive trade to place today, and potentially over the next few trading days, as long as the price of FSLY doesn't move too dramatically before then and you’re able to generate enough premium income to your liking.
Our Thesis:
Our overall thesis is simply that we consider FSLY to be an attractive long-term business, and it is trading at an attractive near-term price as volatility grips the market and this stock in particular. Specifically, the shares fell hard after the TikTok news and they fell again after the most recent vaccine news. This is an attractive long-term business at an attractive near-term price.
Important Trade Considerations:
Two important considerations when selling put options are ex-dividend dates and earnings announcements because they can both impact your trade. Fastly just announced earnings at the end of October, so that volatility risk is off the table during the duration of this trade (and Fastly’s earnings numbers were fairly consistent with their revised earnings expectations guidance (following the TikTock news) and expectations going forward are for continued high growth.
Conclusion:
We like Fastly’s business over the long-term. It is a leader in a space that is growing rapidly as the internet continues to evolve. Fastly can make cloud-based applications work better, faster and safer. If shares of Fastly get put to us within the next few days (before the options contract expires) at the lower price of $63—we’re happy. And if they don’t get put to us, we’re still happy to keep the attractive upfront premium income this trade generates for us. Furthermore, if the shares don’t get put to us when the options contract expires, we can implement a similar option trade strategy on another name thereby potentially growing this alternative income stream repeatedly in the future.