Weekly Option Windfall: Snowflake Call Spread Boasts 31% Profit Potential

Yahoo

6 days ago

The artificial intelligence boom has kicked into high gear.
Snowflake is one of the companies leading the AI movement. Its cloud-based platform includes AI Data Cloud, which enables customers to consolidate data to drive meaningful business insights, build related applications, and solve complex business problems.
The stock is displaying relative strength and hitting a series of 52-week highs. Recent price movement is a sign of strength as we head further into 2025. Increasing volume has attracted investor attention as buying pressure accumulates in this leading stock.
Snowflake is part of the Zacks Internet - Software industry group, which currently ranks in the top 19% out of more than 250 industries. Because this group is ranked in the top half of all Zacks Ranked Industries, we expect it to outperform the market over the next 3 to 6 months, just as it has so far this year:
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Historical research studies suggest that approximately half of a stock's price appreciation is due to its industry grouping. In fact, the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1.
It's no secret that investing in stocks that are part of leading industry groups can give us a leg up relative to the market. By focusing on leading stocks within the top industries, we can dramatically improve our stock-picking success.
Snowflake solves long-standing challenges related to data silos and governance by providing secure access and sharing capabilities, often without moving or copying the data across multiple clouds. The company's customers can combine datasets, enhance data science efforts, and monetize insights with near-zero infrastructure maintenance.
In the first-quarter, the company introduced more than 125 product capabilities to the market, a 100% increase year-over-year. Products like Generation 2 Warehouses, Adaptive Compute, Openflow and Snowflake Intelligence are helping drive new enterprise adoption.
Snowflake's customer-centric, consumption-based pricing model ensures users only pay for the resources they use. This provides Snowflake with a recurring, high-margin revenue stream.
Partnerships and acquisitions have been a key catalyst for Snowflake. The company's rich partner base includes the likes of NVIDIA, Amazon, Microsoft, ServiceNow and Meta Platforms.
Snowflake SNOW has built up an impressive reporting history, surpassing earnings estimates in each of the past four quarters. The company delivered a trailing four-quarter average surprise of 34.7%.
Growth trends remain quite favorable, with Snowflake's bottom line expected to leap 27.7% in fiscal 2026 to $1.06 per share. Revenues for the year are projected to surge 24.6% to $4.52 billion.
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While there are many ways to take advantage of a bullish move in SNOW stock, options provide us with flexibility, enabling us to tailor our strategy to the current market environment.
When done correctly, trading options provides huge profit opportunities with limited risk, making options one of the most versatile investment vehicles.
Before we analyze today's trade, let's review some option fundamentals as a refresher. There is no need to worry about complex mathematical formulas or equations. Over the years I've found that the more complicated a strategy is, the less likely it is to work over the long run.
Options are standardized contracts that give the buyer the right – but not the obligation – to buy or sell the underlying stock at a fixed price, which is known as the strike price. A call option gives the buyer the right to buy a particular security, while a put option gives the buyer the right to sell the same. The investor who purchases an option, whether a put or call, is the option buyer, while the investor who sells a put or call is the seller or writer.
These contracts are valid for a specific period of time which ends on expiration day. There are weekly options, monthly options, and even LEAPS options which are longer-term options that have an expiration date of greater than one year.
Option spreads can be an extremely effective strategy. Debit spreads are implemented by purchasing a call option and selling a related call option with a higher strike price. These types of trades are limited risk trades because the short option is 'covered' by the option purchase.
Below we're going to explore a call option spread strategy.
Snowflake has been outperforming the market off the April lows and currently meets our criteria for initiating a bullish call option spread position.
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The table below displays the risk/reward profile for this trade. SNOW is trading at $217.34/share at the time of this writing. This trade involves purchasing the August 190-strike call at 30.2 points (yellow box), and selling the August 200-strike call at 22.6 points (orange box) for a total cost of 7.6 points. As option contracts represent 100 shares of the underlying security, this would translate to a total cost of just $760 per spread (brown box).
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The top (blue) row in the lower section shows the performance of SNOW stock based on different percentage scenarios at expiration. The last (purple) row shows the corresponding percentage return for our debit spread trade. We can see that regardless of whether SNOW increases in price, remains flat, or even loses 5% from our entry, our option spread trade will produce a 31.6% return.
These are types of odds I like to have in my favor when trading options.
1) The Option Sale Provides Downside Protection
The sale of a call option results in cash being credited to your brokerage account. This reduces the cost basis of the option purchase and provides downside protection in the event the price of the underlying stock declines.
2) Risk is Reduced
In the SNOW trade just presented, the sale of the 200-strike call reduced the risk of the 190-strike purchase from $3,020 to just $760 per contract.
3) Allows Us to Maintain Positions During Volatile Markets
The downside protection provided by the call option sale helps us maintain our spread trade during heightened volatility. Naked option purchases may force us to sell early in order to prevent large losses.
4) Spreads Can Be Profitable If Stock Goes Up or Down
Option spreads can be profitable even if the underlying stock decreases or remains flat, providing us with an entirely new dimension of money-making opportunities.
Remember that the call option sold through this strategy profits as the price of the underlying stock declines, providing us with a cushion during market pullbacks.
Option spreads are a safe way to use the leverage inherent in options. Your risk is limited to the price paid for the spread. The call option spread strategy is an excellent way to take advantage of the bullish move in SNOW as the stock looks primed to continue its outperformance.
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This article originally published on Zacks Investment Research (zacks.com).
Zacks Investment Research