PANW is a high-quality company but currently overvalued as the price reflects growth through 2027.

Palo Alto Networks shares are making headlines after Bernstein downgraded the cybersecurity stock from " outperforming" to " matching" performance.

However, the company is still raising its price target as a reflection of increased demand for cybersecurity and how to leverage it amid concerns about cybersecurity risks associated with artificial intelligence .

However, after the rise of Palo Alto and other cybersecurity companies, Bernstein believes that too much optimism has already been priced into the stock price.

The company also notes that trading in the stock has become more crowded. Palo Alto has an average "overweight" rating and an average target price of around 403 according to FactSet data .

Keep in mind that stocks have risen by more than 100% since the beginning of the year. Now it's time for a "tug-of-war " round around Palo Alto Networks.

So, before we move on to your trading examples, we want to know your thoughts on Palo Alto Networks. Every report I've read about Palo Alto Networks talks about all the great things that are happening, but growth has started to slow down a little.

The growth rate has begun to slow down slightly. Organic growth slowed to 14% in the last quarter, and everyone is talking about it being a good company.

The stock has far exceeded its true value , and the valuation is extremely high. It is true that it is a high-quality company with strong recurring revenues and solid free cash flow, but as I said, every report I looked at came back to the fact that the valuation premium compared to its sector is normalized to 2027.

So, it seems that people are concerned about this. Most people say the stock has performed brilliantly, but it's simply too expensive, Diane and Tom.

He lowered the ratings for Palo Alto, Octa, and Sentinel One , but raised the price target for all of them. He also raised the price target for CrowdStrike, Fortnite, and some other names in the sector, but spoke about fair value.

Kevin mentioned the fact that their organic growth is slowing down, but if you look at their acquisition history over the past year or so , they have bought Console, Portkey, Coil Security, and CyberArk.

So, they do that through mergers and acquisitions activity, right? Many of these companies offer an immediate payment. It generates immediate returns as soon as it is purchased. So, this is the benefit of their growth.

I looked at their figures for the last quarter; fourth fiscal quarter revenue grew by 34%. Their remaining performance obligations exceeded $20 billion for the first time, reaching $21.2 billion, a 34% year-over-year increase.

So, these numbers have started to rise, and I think the discussion about valuation will come up at some point, but in the meantime, the amount of cybersecurity protection these companies will need as they build AI agents will be enormous.

We may not even know the total market that can be addressed, or the type of cybersecurity that businesses will need in the future. And I think that's the source of optimism in that area as well.

I looked at something that leaned towards the downside, which is not surprising, Diane and Tom. I looked at a calendar difference of two weeks, or actually three weeks. I have a projected movement for September 8th of around $23.

I have a move on October 2nd, or let's say a move on October 9th, for about $39. I chose something roughly in the middle at $30.

I looked at the valuation difference of the put option at a price of 350 on October 9 and September 25. It is trading at around $5.25, which is the price we have set.

It may be trading at a price ten cents higher because the stock was higher. It has dropped slightly. It remains positive for today, but has retreated from its highest levels.

This gives you about nine and a half selling deltas, but it also gives you about 16 buying vega, Tom. So, this double exposure gives you directional betting with Delta and implied volatility betting with Vega buy, Tom.

So, about $30 less on the calendar spread of a two-week put option, Tom .

Yes, you are giving yourself some downside exposure in this trade example, but let's analyze this . Weekly option for October 9th. So, 22 days until expiry, buy a put option at a strike price of 350, then sell the same put option at 350 in the September 25 weekly options that expire in 8 days.

The spread of a bearish put option with a two-week interval. You pay a discount cost of approximately $5.25. This is your risk, $525.

And you can see here from the risk profile, where is the peak profitability in this deal? Okay, at or near the execution level of 350 . But this is also a range-bound strategy, so you will likely have a range of approximately 330 on the downside and perhaps 370 to 375 on the upside to potentially make a profit from this trade.

It still needs to move towards the downside, doesn't it? From current levels. What you don't want to happen is for the stock to stay above 375 or to fall below the 330 level. Then you start losing profitability on this trade as well.

As the expiration date approaches next week, you will have the ability to roll over that short option to earn credits. And what does that do? Well , it also increases potential profitability when you pool balances and reduces risk in this type of trade on the downside .

Now , you're only doing this if you think the stock will drop towards 350, right? So, the example deal that Kevin gave us, you pay a lot for it, 525, but the rollover values ​​for the options at the current market price are very large on the put option side .

If you carry over the 375 calendar spread, you collect more than $6.50 on that alone. Therefore, these migrations or potential modifications that you can make actually provide a significant boost to this type of strategy. So, keep that in mind.

However, the relatively neutral and slightly bearish put options calendar gives you a downside exposure in Palo Alto . Kevin, I've become a little more conservative about this , and I've gone a little further back in time .

I chose October 16 options that expire in 29 days, and looked at the charts for this stock to put this vertical spread of the neutral to bullish put options, because of the 50-day simple moving average, which we have now come back above. That might become a support level at $352.

Therefore, I use that as a guide to my strategy along with the higher probability of success. But I sold a put option at an execution price of 350 and bought a put option at an execution price of 340.

So , it's a vertical spread of neutral to bullish put options with a bid of $10, and I get a credit of approximately 260 for that.

It's probably trading near 290 because the stock has dropped a little back towards the short strike price of 350. But, if you add up that balance of 260, that will lower my breakeven point to 347.40 on the downside, Kevin.

So, I have a lot of margin of safety and I'm below that 50-day simple moving average .

Yes, the vertical selling price difference with a $10 bid totals about $260 , and maybe a few cents more. The risk in this deal is $10, which is the difference between the execution prices minus any credit you receive.

It has a high probability of success. It accumulates the value of "theta", and of course, it is always a defined risk.

Yes, a $740 risk to earn $260 in this deal , but these are the trade-offs we're talking about. You have a large safety margin of up to $347.60 or $347.40 as a break-even point on the downside.

So you will profit if the stock goes up , stays here, or even if it goes down a little. You just want it to stay above $350, Diane.

So, you have a negative vertical sell spread, a negative bullish vertical sell spread, and a bearish "Kevin" sell calendar.