Veeva Systems: Catch a Pre-Earnings Run

Veeva Systems (VEEV) is set to report earnings in a few weeks, but it looks poised for a pre-earnings run.

Since the company isn't expected to report earnings before the monthly expiration, I believe there are two approaches a trader could use here. First, the idea of a short-term call spread using the November options. Second, a simple long call via a December or later expiration.

The reason I'm looking at one or both approaches is the current setup in the daily chart. VEEV has been trading in a very wide wedge, finally breaking out on Friday. The stock is running into some longer-term resistance from late July before the big breakdown, but pushing over the more recent resistance is a big positive.

The commodity channel index (CCI) is pushing to new highs in front of price along with the relative strength index (RSI). The strong push from both trend and momentum in front of price is something I value when looking for calls or call spreads. While the force index isn't making the same high, the huge move in a single late August day on huge volume throws off the indicator a bit. It is still strong enough to consider volume very bullish. A close over $27.25 is ideal, but I like the two-fold setup.

First, in order to try and catch a pre-earnings breakout, a November call spread can be used. We don't have the elevated implied volatility from earnings to contend with, but we do get the benefit of the 17% short float perhaps getting a bit nervous with the technical setup and forthcoming earnings.

A simple approach of buying an in-the-money call while shorting an out-of-the-money call to create a call spread would be my approach. While this would define reward, it would also define risk. I don't want to be long this should price close under $26. A simple November 26-28 call spread will be my approach. With the market weakness this morning, I do want to make sure $26.50 holds, so I'll give the stock an hour to trade first.

To play this one into earnings, I don't want to limit my upside. A solid report along with that big short float and the recent selloff could create a squeeze pushing VEEV back into the $30s. Knowing I don't want to own the shares under $26, a December 26 or 27 call feels like the correct approach.

The biggest risk is the time value priced into the option along with the volatility. I know I will see a volatility implosion after the earnings announcement along with having to hold this one through the Thanksgiving holiday time. Factor in the market can slow come December and you realize there are risks to owning either of those calls, but I see the potential for a huge short squeeze. Plus, with the knowledge of the forthcoming catalyst, I find it a risk worth undertaking.

Truth be told, I'm more likely to get wiped out on the call from a disappointing earnings report than time decay or implied volatility being cut in half. Therefore, I define my risk with the understanding I'm looking at a 90% loss if I'm wrong, but I'll have something more than a 100% winner if I am correct.

Given the current setup just explained, I believe my odds at a positive result outweigh those of a negative one and my upside from a positive result is greater than my risks; therefore, I make the trade.

Again, I'm going to give VEEV a bit of time this morning, but as long as it is trading over $26.50 after 60 minutes into the day, I plan to enter both bullish positions.

At the time of publication, Collins had no holdings in the securities mentioned, but positions can change at any time.