Snap Stock’s Seesaw Is an Opportunity to Profit!
Snap Inc (NYSE:SNAP) stock falls in and out of favor often on Wall Street. But judging by how long my 16-year-old and his friends spend on Snapchat, the app is still as popular as ever. This tells me that the original bullish thesis on Snap stock is alive and well.
So, in theory, dips are opportunities to get long the stock. I have previously traded it successfully by betting on stock support and today I want to do it one more time. The macroeconomic environment is still more bullish than ever so the stage should be set for support to hold once more.
Before you peg me a perma-bull for SNAP stock, I have been on record critical of its management. I think they made a colossal mistake labeling themselves as a camera company. This not only forces investors to draw comparisons to the failed stock of GoPro Inc (NASDAQ:GPRO), it also puts them in competition with every cell phone on the planet. To that, I have yet to see any SNAP spectacles on the street.
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In the absence of tangible value from a price-to-earnings perspective, I am left trading the price action. Investors have pushed twice against the recent lows and both times bulls stepped in. So I expect them to do the same again and I am willing to bet on that.
Much like Twitter Inc (NYSE:TWTR), it will take investors long before they get over the doubts over SNAP usage metrics. I concentrate on the overall idea that something this popular will eventually make money. If this management team fails, then they will be bought out. There is too much investment money available to let a platform this popular to just die. And therein lies my opportunity.
Many investors lost money betting waiting for the upside of TWTR buyout headline. I instead chose to profit by successfully betting on support. I have already done this for SNAP several times, and today I will again bet on the support to hold.
This is a bullish trade but one that doesn’t need a rally to profit. If one comes then I profit faster but at least my risk has plenty of room for error.
Using SNAP options allows me to minimize my dependency on perfect timing. As long as I choose my support levels carefully I can win even if the timing is imperfect. The only caveat is that I am willing and able to temporarily own SNAP stock if my thesis dies. I consider this a speculative trade inside a conservative portfolio.
The Bet: Sell SNAP Feb $10 naked puts. This is a bullish trade for which I collect 30 cents per contract. Here I have an 85% theoretical chance of winning, else I accrue losses below $9.70.
Selling naked puts carries big risk especially in a speculative ticker like SNAP. For those who want to mitigate it, they can sell a spread instead.
The Alternate Bet: Sell the SNAP Feb $11/$10 bull put spread where I have about the same odds of winning but with smaller risk. Yet, the spread will still deliver 12% yield. Compare this with risking $14.50 now and with no room for error expect a 12% rally just to match that of the spread.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose.
Get my newsletter for free here. 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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