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TheStreet Open House

The Holidays Come Early for Red Hat Investors

Stocks in this article: RHT ORCL MSFT

Red Hat's sales mix consisted of 35% direct sales, with 65% of sales coming from reseller channels. Services continues to grow and increased 10% year over year. Red Hat's model of creating enterprise solutions from relatively free Linux demonstrates how competitive Red Hat is.

I am bullish with Microsoft (MSFT) also, but from a technical analysis review, Red Hat is set to continue higher. The clear break above the widely followed moving averages places the chart into a bullish trend once again. I wouldn't try to chase it, however. A pullback into the $52 to $54 range will give you a much better risk-to-reward ratio in my opinion.

The company doesn't pay a dividend, so consider selling a put option as your vehicle of entry. You will have less risk, and if the shares don't appreciate from the current levels you still have an opportunity to profit. I like the March expiration $50 strike put options before the end of the year if I can sell them for $1.25 or higher during a retracement after today.

I also like the January $60 calls for $1.20 or higher as a covered call for current shareholders. There isn't a lot of time until expiration, and if the stock continues to appreciate your effective sale price is $61.20.

I think the time decay outweighs the potential to miss out on continued gains in such a short time period.

At the time of publication, the author had no positions in securities mentioned.

Follow @RobertWeinstein

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.




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