In today’s episode I want to talk to you about Chegg (CHGG). It’s been a while since I’ve mentioned this stock, but I figured it was time to revisit it, explains Danielle Shay of Simpler Trading.
This is a company in which I hold stock, and I think that the long-term potential of the stock is pretty solid.
Reasons I Think It's a Good Investment:
First off, the fact that the company has innovated over time. They started out as a textbook-renting service, but they’ve evolved and now offer a lot of different options for online learning. Some of these options include, flashcards, tutoring, writing help, internships, and more. Couple that innovation with COVID, and now we’ve seen an even steadier climb of this stock as many students have transitioned to online learning.
CHGG & Earnings:
Due to its steady incline, I knew I wanted to trade CHGG’s earnings report. I began looking at CHGG by putting it through my run-into-earnings tool, and I could quickly see that out of the last 12 quarters, they beat estimates 11 times.
This was a great sign, but as you know, just because company’s beat their estimations, doesn't necessarily mean they traded higher. So, then I went back and consulted my tool, and it showed me that the majority of the time it did trade higher after earnings.
After noting all the facts outlined above, it made sense for me to be bullish.
Breaking Down the Trade:
Going into the trade I had put on my Fib extensions because that's what I like to use to identify targets, and I got a target of $113.66. That was very close to $115, and when I'm using an upside target, I always want to use a round number, especially if it has a high open interest.
With this, I ended up placing a butterfly in the week after earnings. I decided to set up a 105, 115, 125 butterfly. I only paid $1.70. With a butterfly like this, it's $10 wide, so really the max you could get is about a 5X.
Since I ended up taking off this trade seven days prior to the expiration, I wasn’t able to get 100% of the profit, but with butterflies I like to target anywhere from 50% to 200% range. This is because those are going to be your regular winners.
We don't need to be absolutely perfect to make money on the trade. All we need is for the price of stock to be as close as it can to that center strike within about a week of an expiration. In doing that, you can get a 189% winner like this one!
To learn more about Danielle Shay, visit www.fivestartrader.com.
