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Zuora Set to Surprise to the Upside

After rough year, ZUO looks like it might break out before earnings, so here's how to play it.
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Zuora (ZUO) bulls have endured a rough year thus far. While the stock is only down 13% year-to-date, it is roughly 36% off its year-to-date highs -- and 57% below its all-time highs. The company offers cloud-based software via a subscription service to help companies launch their own subscription service. It's essentially leverage on the subscription model and, in most cases, the cloud model.

Soft guidance in May sent shares into a tailspin. Despite last quarter demonstrating more stability and some recovery, Zuora has failed to recover much of what it lost in the spring. Unfortunately, the stronger-than-expected August earnings report hit during a time when the "cloud" technology was decimated in the markets. With earnings approaching on Dec. 5, we may get a little run in anticipation of continued improvement. With nearly 8.5% of the float short and valuations near a low, we could also see folks locking in some profits on the short side.

Since June, shares have traded in a range about $2 wide. This week, they appear to be set for a breakout higher in front of earnings. Holiday-shortened weeks are always a little more challenging. Small volumes can move a stock, but I imagine we'll remain quiet this week. I'm keyed on the push higher in the Chaikan Oscillator, combined with the bullish crossover in the Full Stochastics indicator. Shares have moved above both the 10-week simple moving average and 21-week simple moving average, so those levels, around $15, should be the first line of support with the August closing lows as secondary support.

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While earnings announcement next week should keep implied volatility elevated in the near-term options, the holiday passage and lack of trading will cause some time decay; therefore, rather than a call-only trade, I would consider a combination trade. The idea of a diagonal trade appeals to me with the $18 upside target.

The trade:

Buy to open January 20, 2020, $16 call

Sell to open Dec. 17, $17.50 call

Net cost: $90

Max risk: $90

Max reward: $60 until Dec 17, potentially unlimited after that

Days until expiration: 24 and 52

Break even: $16.90

Intrinsic value: $7

At the time of publication, Collins had no position in the securities mentioned.