After lagging in the beginning of the year, technology stocks have seen a resurgence with the Nasdaq hitting new 12-year highs in the last few sessions. The double-digit gains in the sector have made some forgotten companies more attractive as money flows back into tech.
Networking and communication devices company Juniper Networks (JNPR) has fallen 13% in the past year versus the 19% gain in the S&P 500 during that time. Currently trading below $17, shares have a decade-long support base at $12 to lean on.
I think this tech stock is worth holding for a potential recovery. Cash on hand of about $2.7 billion is more than one-third of the company's market value. As a percentage of value, that far exceeds tech behemoth Apple (AAPL) in terms of a cash cushion.
A higher low was made in 2012 just above $14 compared to the 2009 low. Over the past nine months, JNPR has traded between $23 and the current support at $16 per share. A midpoint pivot target sits at about $19.50.
The $19.50 target is about 16% higher than current prices, but traders who use a capital-preserving, stock substitution strategy could more than double those returns on a move to that level.
One major advantage of using long call options rather than buying a stock outright is putting up much less capital to control 100 shares -- that's the power of leverage. But with all of the potential strike and expiration combinations, choosing an option can be a daunting task.
Simply put, you want to buy a high-probability option that has enough time to be right, so there are two rules traders should follow:
Rule One: Choose an option with a delta of 70 or above.
An option's strike price is the level at which the options buyer has the right to purchase the underlying stock or ETF without any obligation to do so. (In reality, you rarely convert the option into shares, but rather simply sell back the option you bought to exit the trade for a gain or loss.)
It is important to buy options that pay off from a modest price move in the underlying stock or ETF rather than those that only make money on the infrequent price explosion. In-the-money options are more expensive, but they're worth it, as your chances of success are mathematically superior to buying cheap, out-of-the-money options that rarely pay off.
The options Greek delta approximates the odds that an option will be in the money at expiration. It is a measurement of how well an option follows the movement in the underlying security. You can find an option's delta using an options calculator, such as the one offered by the CBOE.
With JNPR trading at about $16.80 at the time of this writing, an in-the-money $12 strike call option currently has $4.80 in real or intrinsic value. The remainder of the premium is the time value of the option. And this call currently has a delta of about 88.
Rule Two: Buy more time until expiration than you may need -- at least three to six months -- for the trade to develop.
Time is an investor's greatest asset when you have completely limited the exposure risks. Traders often do not buy enough time for the trade to achieve profitable results. Nothing is more frustrating than being right about a move only after the option has expired.
With these rules in mind, I would recommend the JNPR Jan 2014 12 Calls at $5.45 or less.
A close below $14 in the stock on a weekly basis or the loss of half of the option's premium would trigger an exit. If you do not use a stop, the maximum loss is still limited to the $545 or less paid per option contract. The upside, on the other hand, is unlimited. And the January 2014 options give the bull trend almost nine months to develop.
This trade breaks even at $17.45 ($12 strike plus $5.45 options premium). That is less than $1 above JNPR's current price. If shares hit the upside breakout target of $19.50, then the call options would have $7.50 of intrinsic value and deliver a gain of almost 40%.
For more analysis on JNPR, see the video below (starting at 2:40):
Recommended Trade Setup:
-- Buy JNPR Jan 2014 12 Calls at $5.45 or less
-- Set stop-loss at $2.72
-- Set initial price target at $7.50 for a potential 38% gain in eight and a half months