We initiated our call fly in SODA prior to earnings with the expectation for a beat coupled with a technical situation that indicated the 65 level as a potential magnet in the near term. Well, we couldn’t have asked for a better resolution after earnings, as SODA rallied and stalled right near its 50 day moving average around 66. With one week left to expiry on our fly, the structure is currently worth around $7. We could try and squeeze another dollar or two by waiting over the next week, but we think it’s prudent to take our gain here given our 2.75 cost base and the recent volatility in the stock.
Action: Sold the SODA (64.10) Aug16th 55/65 1×2 Call Spread at $7.04 for a $4.29 gain (Remain long the Aug16th 75 call since it has no bid)
Original Trade July 16, 2013: $SODA – Gettin’ Busy With the Fizzy
The price action in Sodastream over the past week has been an absolute battle around an important resistance level. The stock rallied into its earnings number, reported earnings yesterday morning, sold off after the report (which seemed pretty good to me), and then is getting bought hard again today. All of that back and forth, emotional action has occurred as the stock tests its $54-$55 resistance area:
I’ve included the lower volume panel to show the increased interest around this level as the stock has moved back and forth in the past week. While a clean breakout would be nicer, I think the stock has built the necessary energy, and I’m looking for the breakout to hold.
The stock did indeed breakout and did not look back, making it all the way up to almost $80 on that push higher. But July has been unkind to SODA, and the stock has retreated all the way back down to near the $54-$55 breakout area:
I expect prior resistance to act as support going forward. Interestingly, ever since the breakout in May, the stock has been very volatile due to numerous headlines (rumors of KO or PEP being interested in June, and talk today about GMCR coming out with a competing soda product), but very little has come out of the company in the way of fundamental business updates. The stock’s next earnings report is the morning of July 31st. Part of my optimism in the Spring was due to the company’s strong results in the U.S., its main growth market:
Fast forward to yesterday’s earnings release, and the U.S. continues to be the driver of the growth, with little change to recent trends. The U.S. market is by far the biggest opportunity for SODA, and its 90% yoy increase in sales in the U.S. (34% overall, as the rest of the world was only up 10%) is a strong reason for optimism. Its valuation doesn’t seem to reflect that optimism.
Technically and fundamentally, I like the setup, so here’s the trade:
TRADE: SODA ($57.65) Bought Aug 55/65/75 Call Butterfly for $2.75
-Bought 1 Aug 55 Call for $5.77
-Sold 2 Aug 65 Calls at $1.75
-Bought 1 Aug 75 Call for $0.48
Break-Even on Aug Expiration:
Profits: Profits up to 7.25 when stock between 57.75 and 72.25 on Apr expiry, with max profit of $7.25 with stock at 65
Losses: Up to 2.75 between 55 and 57.75, and between 72.25 and 75, with max loss of 2.75 at 55 or below, or at 75 or above.
Trade Rationale: SODA sets up well technically and fundamentally, and the stock’s earnings event before August expiry provides a catalyst for the stock to gain footing near technical support. All of the overhead supply from the past 2 months of price action likely will make it difficult for SODA to rally to the high end of the butterfly, which is why we chose the 55/65/75 strikes for this trade.