Breaking News
Get 45% Off 0
💰 With a 129% YTD gain in the bag, these are our AI’s top global picks for March
Read now

Expecting Zoom Shares To Head Higher? A Bull Call Spread Could Be A Way To Profit

By Investing.com (Tezcan Gecgil/Investing.com )Stock MarketsJan 20, 2022 12:40
uk.investing.com/analysis/expecting-zoom-shares-to-head-higher-a-bull-call-spread-could-be-a-way-to-profit-200507968
Expecting Zoom Shares To Head Higher? A Bull Call Spread Could Be A Way To Profit
By Investing.com (Tezcan Gecgil/Investing.com )   |  Jan 20, 2022 12:40
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
 
ZM
+0.03%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
TGTB34
-2.00%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
ZM
-0.16%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
  • Zoom Video Communications stock is down about 14.1% year to date.
  • As more workers return to the office, investors have been concerned about Zoom’s growth metrics
  • Long-term investors could consider buying ZM shares around current levels
  • Investors in the software application technology stock Zoom Video Communications (NASDAQ:ZM) have not started the new year on a high note. ZM shares have declined more than 14% since the beginning of the year.

    In comparison, the Dow Jones Software Index is down 10.2%. Meanwhile, the NASDAQ 100 Index has declined 6.9% so far in January.

    Zoom Weekly Chart.
    Zoom Weekly Chart.

    On Feb. 16, 2021, ZM shares went over $450 to hit a record high. But in recent days, the stock saw a 52-week low. Its 52-week range has been $156 - $451.77; ZM's current market capitalization stands at $47.1 billion.

    The video-chat name was one of the darlings of 2020, when work-from-home became a dominant investing theme. Most readers would be familiar with Zoom’s cloud-based software that enables users to have video calls. There are also chat tools available on the platform. The pandemic-induced increased demand for tele-health services and remote education also provided tailwinds for Zoom shares in 2020.

    However, with the vaccine rollout in early 2021, stocks of stay-at-home technologies like Zoom came under pressure. Understandably, Wall Street has been concerned about frothy valuation levels as well as future growth metrics.

    Zoom released Q3 figures on Nov. 22. The top line was $1.05 billion, up 35% year-over-year. Adjusted net income was $338.4 million, or $1.11 per share. Free cash flow stood at $374.8 million. A year ago, it had been $388.2 million.

    On these numbers, CEO Eric S. Yuan said:

    “Looking forward, we expect to close the year between $4.079 to $4.081 billion in total revenue, representing approximately 54% year-over-year growth, alongside strong profitability and operating cash flow growth.”

    The San Jose, California-based company's communications group currently has more than 2,500 large customers, i.e., those enterprises that generated more than $100,000 in revenue in the trailing 12 months. Now, Zoom is working to enhance the platform with new applications.

    Still, analysts point out that Microsoft's (NASDAQ:MSFT) Teams collaboration tools pose a major threat to Zoom’s future growth.

    Prior to the release of the quarterly results, ZM stock was trading around $242. Now, Zoom shares change hands at $157.23 as of Wednesday's close.

    Next Move In Zoom Video Communication Stock?

    Among 30 analysts polled via Investing.com, Zoom shares have an outperform” rating, with an average 12-month price target of $304.96. Such a move would imply an increase of well over 90% from the current level. The target range is between $200 and $643.

    Consensus Estimates of Analysts Polled By Investing.com.
    Consensus Estimates of Analysts Polled By Investing.com.

    Chart: Investing.com

    Similarly, according to a number of valuation models, like those that might consider P/B or P/S multiples or terminal values, the average fair value for ZM stock via InvestingPro stands at $226.12.

    Fair Value Assessment by InvestingPro.
    Fair Value Assessment by InvestingPro.

    Source: InvestingPro

    Meanwhile, we can look at Zoom’s financial health as determined by ranking more than 100 factors against peers in the information technology sector. In terms of profit health, it scores 5 out of 5 (top score). And cash flow and growth health stand at 4. Zoom's overall performance is rated “great.”

    ZM Financial Health Chart
    Chart

    Source: InvestingPro

    Long-term investors who are not concerned about short-term volatility in ZM stock could consider investing at current levels. Their price target should be around $220, as indicated by the stock’s approximate fair value.

    Others, who are experienced with options, could look at alternative strategies. For instance, those who believe that the decline in Zoom shares could soon come to an end and that a new bull leg might begin could try a bull call spread.

    However, most option strategies are not suitable for all retail investors. Therefore, the following discussion on Zoom stock is offered for educational purposes and not as an actual strategy to be followed by the average retail investor.

    Bull Call Spread On Zoom Stock

    Price At Time Of Writing: $160.10

    In a bull call spread, a trader has a long call with a lower strike price and a short call with a higher strike price. Both legs of the trade have the same underlying stock (i.e. Zoom Video Communication) and the same expiration date.

    The trader wants ZM stock to increase in price. But the expectation is for a moderate increase in Zoom shares.

    Thus, in a bull call spread both the potential profit and the potential loss levels are limited. Such a bull call spread is established for a net cost (or net debit), which represents the maximum loss.

    Let’s look at this example:

    For the first leg of this strategy, the trader might buy an at-the-money (ATM) or slightly out-of-the-money (OTM) call option, like the ZM Apr. 14, 170-strike call. This option is currently offered at $14.10. It would cost the trader $1,410 to own this call option that expires in slightly less than three months.

    For the second leg of this strategy, the trader sells a Zoom call, like the Apr. 14, 180-strike call. This option’s current premium is $10.45. The option seller would receive $1,045, excluding trading commissions.

    Maximum Risk

    In our example, the maximum risk will be equal to the cost of the spread plus commissions. Here, the net cost of the spread is $3.65 ($14.10 – $10.45 = $3.65).

    As each option contract represents 100 shares of the underlying stock, i.e. ZM, we’d need to multiply $3.65 by 100, which gives us $365 as the maximum risk.

    The trader could easily lose this amount if the position is held to expiry and both legs expire worthless, i.e., if the Zoom stock price at expiration is below the strike price of the long call (or $170 in our example).

    Maximum Profit Potential

    In a bull call spread, potential profit is limited to the difference between the two strike prices minus the net cost of the spread plus commissions.

    So in our example, the difference between the strike prices is $10 ($180 – $170 = $10). And as we’ve seen above, the net cost of the spread is $3.65.

    The maximum profit, therefore, is $6.35 ($10.00 – $3.65 = $6.35) per share, less commissions. When we multiply $6.35 by 100 shares, the maximum profit for this option strategy comes to $635.

    The trader will realize this maximum profit if the ZM stock price is at or above the strike price of the short call (higher strike) at expiration, or $180 in our example.

    Short call positions are typically assigned at expiration if the stock price is above the strike price (i.e., $180 in this example). However, there is also the possibility of early assignment. Therefore, the position would need monitoring up until expiration.

    Break-Even ZM Stock Price At Expiration

    Finally, we should also calculate the break-even point for this trade. At that price, the trade will not gain or lose any money.

    At expiration, the strike price of the long call (i.e., $170 in our example) plus the net premium paid (i.e., $3.65 here) would give us the break-even ZM price.

    In our example: $170 + $3.65 = $173.65 (minus commissions).

    Bottom Line

    Zoom stock, a pandemic darling during the early days of the global outbreak, has been battered in recent months. Yet, despite the short-term choppiness in shares, Wall Street agrees the growth trajectory remains intact for the communications platform as many companies are still likely to rely on its product offerings. Bear in mind, Zoom could also find itself a takeover candidate going forward.

Expecting Zoom Shares To Head Higher? A Bull Call Spread Could Be A Way To Profit
 

Related Articles

Dr. Arnout ter Schure
Is the Nasdaq 100 in a Long-Term Bear Market? By Dr. Arnout ter Schure - Mar 06, 2025

Using the Elliott Wave Principle (EWP), we have been tracking the most likely path forward for the Nasdaq 100 (NDX). Although there are many ways to navigate the markets and to...

Expecting Zoom Shares To Head Higher? A Bull Call Spread Could Be A Way To Profit

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Apple
Continue with Google
or
Sign up with Email