This Data Dog is Hungry

Sean McLaughlin
September 23, 2020

We're seeing a lot of follow thru in names that have been highlighted in previous Under the Hood reports. After a brief shakeout, many of these names are back above our levels of interest and are beginning to work (Pinterest $PINS is one brightly shining example!).

The latest one that has the most appealing setup to me is Datadog $DDOG from the SaaS space.

I was chatting backchannel with our analyst Steve Strazza today and he brought this chart to my attention:

Look at those two failed breakdowns below support! And now, it's looking like it is getting pretty serious about breaking the magic one-hundred-dollar line and following through significantly higher.

Steve and I both agree that $120/share looks like a reasonable price target if the "momo crowd" gets a hold of this dog.

While options premiums are relatively subdued in $DDOG options, there is still some pretty juicy premium at the $120 level in January options, so I'm going to use that to my advantage in lowering my cost of participation.

Here's the Play:

I'm buying a $DDOG January 100/120 Bull Call Spread for $5.50 or cheaper. This means I'll be long the 100 calls and short an equal amount of 120 calls for a net debit.

This is a defined risk spread. The most I can lose is the debit I pay at entry. That said, I'll look to minimize my loss if possible if $DDOG fails from here and closes below $75/share. Otherwise, if $DDOG goes our way, I'll look to close the spread for around $13.00. This would mean I've captured a little more than 50% of the maximum available profit in this spread. I'm not interested in hanging around to January expiration in order to capture that full profit. I'd much rather take out 50% of it sooner and move on to the next trade, redeploying that capital elsewhere.

If you have any questions on this trade, please send them here.

~ @chicagosean

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