Salesforce earnings will fuel a software slump, options traders say

crm 5 yrThe software space is slumping for the second straight session after finishing off its best month since January. The group soared through November, with the IGV and XSW software ETFs gaining 8% and 7%, respectively.

The fate of the space heading into the end of the year will be a little clearer Tuesday afternoon. That’s when Salesforce reports earnings. Options market traders aren’t feeling particularly optimistic about the company’s year-end hopes.

“When the stock was trading about $160 shortly after noon, there was a buyer of 5,000 of the December 150-puts, paying $1.25 for those. That’s about 1% of the stock price … and it breaks even down at $148.75,” Optimize Advisors co-founder Dan Nathan said Monday on “Fast Money.”

That trade represents a $625,000 bet that Salesforce will plunge at least 8% between Monday’s closing price of $161 per share and December expiration, and came on a day where the company’s options traded at twice their daily volume. Interestingly, as Nathan would point out, the options market is only implying a post-earnings move of about 4%, which is slightly less than the average post-earnings move in the stock.

However, if Salesforce’s numbers disappoint investors, Nathan sees the stock plunging even further than the 8% decline that this trader is betting on.

“You see that resistance here [at $165], it’s been unable to break out,” said Nathan. “Look at this multiyear uptrend. [Salesforce] has, obviously, been a big outperformer over that period of time, but to my eye, you have some support at $140.”

If Salesforce were to tumble down to that level of support, it would represent a decline of 12.5% from Monday’s close.

Salesforce was trading 1% lower in Tuesday’s session.