Arista Networks (NYSE:ANET) is currently displaying elevated volatility levels, with an IV Percentile of 86% and an IV Rank of 47%. ANET boasts a Strong Buy rating from 14 analysts, including 1 Moderate Buy and 6 Hold ratings.
Arista Networks, Inc. specializes in delivering cloud networking solutions tailored for data centers and cloud computing environments. The company’s product lineup includes 10/25/40/50/100 Gigabit Ethernet switches and routers, designed to optimize next-generation data center networks.
A key feature of Arista’s solutions is its use of multiple silicon architectures across its product range. At the heart of these cloud networking solutions lies the Linux-based Extensible Operating System (EOS), renowned for its full programmability and high modularity. EOS provides robust support for leading cloud and virtualization solutions, such as Microsoft System Center, OpenStack, and various cloud management frameworks.
Notably, Arista co-authored the Virtual Extensible LAN (VXLAN) protocol specification alongside VMware and was the first to demonstrate VXLAN integration. Furthermore, the company has recently expanded its VXLAN routing and integration capabilities.
Today, we delve into a short-strangle trading strategy, capitalizing on the elevated IV percentile. The short strangle strategy seeks to profit from a potential drop in implied volatility, anticipating that the stock will remain within a certain expected range. As implied volatility rises, the expected range widens accordingly. It’s essential to note that the maximum profit achievable with a short strangle is confined to the premium received, while the potential loss is theoretically unlimited. Therefore, this strategy may not be suitable for beginners.
ANET’s Short Stangle Play
Traders who believe that ANET’s stock is likely to remain stable in the coming weeks may consider executing a short-strangle strategy. To recap, a short strangle combines an out-of-the-money short put and an out-of-the-money short call. The goal behind this strategy is to benefit from time decay, assuming that the stock’s price movement will be relatively subdued.
For ANET stock, you could sell an October 20 put with a strike price of $180, fetching approximately $2.40 in premium. Additionally, the short call could be placed at a $200 strike price, with a sale price of approximately $1.50. In total, this short strangle trade will yield approximately $3.90 per contract, translating to a premium income of $390. The profit zone for this trade extends between $176.10 and $203.90, calculated by adding or subtracting the premium received from the short strikes. If price fluctuations stabilize within this range, the short-strangle strategy stands to perform well. However, if ANET’s stock makes a more significant than anticipated move, the trade could incur losses.
Conclusion and Risk Management
Setting a stop loss for a short strangle based on the premium received is one approach. In this case, given the premium income of $390, you might consider a stop loss equal to the premium received, amounting to approximately $390.
Alternatively, you could establish predefined chart points at which you would adjust or close the trade. These points might be around $180 on the downside and $200 on the upside. Remember that options carry inherent risks, and investors can potentially lose their entire investment. Always approach options trading with caution and a well-thought-out risk management strategy.
Featured Image: Freepik @ ilin_sergey
Author Faith Yakubu