A Trade set up for Palo Alto Networks

Tickers discussed:  PANW

A bullish swing trade idea is presented on Palo Alto Networks ( $PANW ). The key levels and trading locations for the stock are provided, along with timely commentary to keep you on the right side of the trade

Background

On Monday November 25, Palo Alto reported earnings and had a dreadful sell-off on Tuesday the 26th dropping from $250 to $220. On Wednesday price put in a hammer reversal candle after tagging the trend line. By looking at the volume, it looks like it could be a capitulation bottom.  On Friday there was positive follow through which is what you want to see after that hammer candle. During these past few days I have been playing the stock intra-day, but now I think the stock sets up for more of a swing trade that traders can stay in for at least a week or two if price gives us a trigger.

Bullish set up.

In the week ahead, I will be looking for more bullish action and an entry into the overhead gap at $228.50. Once in the gap, if the market remains constructive, I expect to see a further advance by price.

Trade Ideas

1. Simply buy calls.

Alarm $228.50 in your system. Once price enters the gap above $228.50 BUY buy the PANW Dec $230 Calls and set your stop just below. If you see price advance, you can then either spread the position if you like or just hold your calls and have a trailing stop.

2. Buy the Dec 6 or Dec 13  PANW 230 / 240 / 250 call butterfly

In this structure you are buying 1x of the 230 Calls, selling 2x of the 240 Calls, and buying 1x of the $250 Calls.  The max profit for this structure is for price to pin at $240 on the day of expiration. Because the width of the structure is relatively wide, there will be a wide pay window.   Here is the graph for the Dec 6th $230 / $240 / $250 call butterfly.  This is the profile for 1 butterfly contract priced at $1.34 debit.  The profile is dependent on the price paid at time of execution, but you can see that in this example the max profit is about $850 per contract for a $134 outlay. About a 6 to 1 risk reward ratio.  The break even is at $231.34 and $248.66.   Remember these profit levels and break even levels are at expiration.   You are welcome to adjust the strikes to your liking. You may want to tighten the width slightly if you’re going to target the Dec 6 expiration.  This structure is a low-risk / high-reward structure from a capital outlay perspective.  If you are new to butterflies, start small with 1 contract or trade it on paper and watch it closely to gain familiarity.

 

Bottom line.

Palo Alto looks to have put in a capitulation bottom. THe price action suggests a further advance if the general market remains constructive. A price move above $228.50 puts price into a $20 gap and would give price a clean run to fill the gap. Once triggered, Traders can get long via Call or a call butterfly.  Another way to express the bullish view would be to sell put spreads below $225 out in time for a week or two. 

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Notes: The charts are and levels are provided as well-informed guidelines. That said, please be aware that exogenous events like surprise tariffs or other events can easily move price through support / resistance zones. Also, set you stops according to your own risk tolerance. The ones I have provided are to be used only as a guide. The most important aspect of your stop is to honor them. Some trades work, some don’t. Honoring your stop will ensure your loss on a failed trade will be minimal.

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