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Dropbox Stock Is Perfect for Those Who Ignore Wall Street’s Hate

Nicolas Chahine

Last night, Dropbox (NASDAQ:DBX) reported earnings and there was after-hour jubilation but it died quickly. DBX stock is down 7.5% in early morning trading.

Luckily for the bulls, coming into the earnings event, DBX stock rallied 30% in the past seven days. So booking profits on the news does not drastically change things. And therein lies the opportunity.

A sharp profit-taking dip in DBX stock may break the upside momentum, but it doesn’t necessarily dictate a sustained reversal. Drops are normal facets of an ascending chart.

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I was lucky enough to be long Dropbox stock since Aug. 1 and I closed it ahead of the report because I feared the binary outcome of earnings reports.

Last night, management delivered big beats on the top- and bottom-lines. Revenues grew 27% year-over-year. DBX now has almost 12 million paid users — a 22% increase. So for now, it looks like the company is successfully implementing its plans.

Maybe that is why DBX stock investors are a bit worried about the departure of the company’s Chief Operating Officer. But those usually are temporary concerns. In most cases, a company’s plans are bigger than one person. After all, Apple (NASDAQ:AAPL) did survive the early and sad departure of its founder Steve Jobs and it has just crossed the $1 trillion market cap.

Fundamentally, since Dropbox stock is a young growth stock, so there is no tangible value from the traditional sense. So for now, I assume that they are headed in the right direction.

I personally have used Dropbox services for years, but have yet to contribute a dime to their sales. In fact, the minute they ask me to pay, I would cancel them. I get similar services from Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) gmail.

Technically, the recent violent 30% rally ahead of earnings not only delivered me call profits, but it also set the support levels. Since I already booked my call profits ahead of the earnings event, I now can catch the proverbial falling knife with kid gloves.

How to Trade DBX Stock on This Dip

I do this using options. I am not one to buy the stock outright, with no room for error, requiring hope for a rally in order to profit. The stock markets are near all time highs.

Using options, today I sell downside risk into what others fear to create income with no out of pocket expense. There is proven support against which I can bet for profit. From here, I have more faith in that to hold into 2018 than in the upside appetite for Dropbox stock.

The Bet: Sell the DBX JAN 2019 $22 naked put for $1. This is a bullish trade, where I have an 80% theoretical chance for maximum gains. Otherwise, I will own shares and accrue losses below $21.

Selling naked puts carries big risk, especially for a stock as frothy as DBX. For those who want to mitigate it, they can sell a spread instead.

The Alternate Bet: Sell the DBX JAN 2019 $22/$20 credit put spread where I have about the same odds of winning, but with much less risk. The spread would yield 15% if successful.

Click here for more of my market thesis and get an ongoing free copy of my weekly newsletters.

Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.

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