Yesterday, I invited you to join my Options360 Service to listen in on this afternoon’s Webinar where I’ll go through my current watchlist and discuss: The strategies I use, what I look for in a trade, why I make the trades I do, and most importantly, which stock I’m currently watching.

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While I’ll be going through my on-the-radar stocks and technique on approaching establishing positions ala my patience waiting for entry points.  However, I would like to share one trade that triggered today that I expect a 72% return on — over the next three weeks. And that’s if the stock does absolutely nothing but hold it’s ground over that respective time period. 

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The stock is C3.ai (AI), a recent IPO (12/20) that came to market with great fanfare, tripling from its offering $60 price, and immediately started flaming out — losing more than half its value in the ensuing months.

People liked that it hit the market at the peak of speculative growth frenzy.  It offers a pure-play on artificial intelligence and comes with a blue-chip pedigree of management led by Siebel Systems founder and legendary Silicon Valley pioneer, Tom Siebel.

What’s not to like? Despite its 50% decline, it still sells at 20x revenue with a very high customer concentration as 10 major corporations account for over 50% of sales.  The business model depends on adding more Fortune 500 corporate clients as de facto distributors in order to create a SAAS model.

It also fell victim to the general sell-off of high growth tech stocks during the February/March rotation and rise in rates.

Items on the fence are shares that are fairly tightly held by insiders and institutions while there’s also high short interest, some 20% of float, creating at least a potential floor in the shares, if not a squeeze.

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The chart below shows that the stock held the $60 IPO price and is now clearing the $70 resistance level. 

Implied volatility of the options is near 80%, or in the 65% percentile — relatively high considering the recent price action stabilization, and that earnings aren’t until mid-June.

 A bull put spread looks attractive.  Specifically: 

-Buy to open 1 contract May (5/21) 65 Put

-Sell to open 1 contract May (5/21)70 Put

For a Net Credit of $2.10 (+/-0.10)  

As you can see from the risk/reward graph below, the maximum profit of the premium of $2.10 collected is realized as long shares of AI are above $70 per share at the May 21 expiration.  That means we can earn a 72% return on risk, even if the stock does nothing for the next three weeks. In fact, shares can actually decline slightly and we’d still earn a profit. This is the power of theta or time decay. 

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