Snap Inc. (SNAP) will report its Q3 results tonight after the close. The options market is implying about a $2.20 move in either direction between now and Friday’s close, or about 15.5%. This can be calculated by taking the weekly at the money straddle cost (with the stock at $14.13 the Oct 25th weekly 14 calls and the Oct 25th weekly 14 put premium equal a combined $2.20) and dividing by the stock price. If you thought SNAP could easily move 15% (the stock on average has moved about 18% the day following earnings since its first report as a public company in mid-2017), but unsure of direction, buying the at the money straddle is one way to make that bet. In this case, you would need a rally above $16.20 or a decline below $11.80 to make money buying the move.
It’s also worth noting that while a 15% implied one day move seems kind of fat, SNAP is up 157% ytd, the stock is still down about 20% from its 2017 IPO price of $17, and down 50% from its brief post-IPO highs.
The stock earlier this month broke down below the uptrend that had been in place from the Dec 2018 lows, and now faces formidable technical resistance at the convergence of the uptrend and the July earnings gap to new 52-week highs:
To suggest that sentiment is mixed in SNAP would be an understatement, with 13 analysts rating the stock a Buy, 24 a Hold and 3 a Sell. Short interest is about 13% of the float.
I find it interesting that the stock has done so well this year, a year where money-losing high growth tech companies who have undoubtedly disrupted massive businesses have faired very poorly, while SNAP is expected to lose $1 billion in net income on a GAAP basis, $300 million adjusted on sales of $1.7 billion. If this company were to miss and guide down, a 15% move would just be the start.
So what’s the Trade?
If I were inclined to play for a miss and guide down and then a sustained decline over the next few weeks I might consider the following put spread:
Bearish Trade Idea: SNAP ($14.15) Buy Nov 13.50 – 10.50 put spread for 70 cents
-Buy to open 1 Nov 13.50 put for 98 cents
-Sell to open 1 Nov 10.50 put at 18 cents
Break-even on Nov expiration:
Profits of up to 2.30 between 12.80 and 10.50 with max gain of 2.30 at or below $10.50.
Losses of up to 70 cents between 12.80 and 13.50 with max loss of 70 cents at or above 13.50.
Rationale: this trade idea risks 5% of the stock price, breaks-even down 9.5% from the current trading level and has the potential to make up to 20% of the stock price if it is down 25% in two months, I know that sounds like a long ways to go, but one would only do a trade like this if they were convicted that the 2019 series of beats and raises was about to reverse and a good chunk of the stock’s 157% ytd gains might be vulnerable. Either way, this trade idea offers a defined risk way to get bearish exposure only risking 5% of the stock price.
If you were inclined to play for a beat and raise and a re-test last quarter’s gap level above $16 then consider the following call spread.
Bullish Trade Idea: SNAP ($14.15) Buy Nov 14.50 – 18.00 call spread for 80 cents
-Buy to open 1 Nov 14.50 call for $1.10
-Sell to open 1 Nov 18 call at 30 cents
Break-even on Nov expiration:
Profits of up to 2.70 between 15.30 and 18 with a max gain of 2.70 above 18
Losses of up to 80 cents between 14.50 and 15.30 with max loss of 80 cents below 14.50
Rationale: this trade idea risks 5.5% of the stock price, has a break-even up 8% from the trading level and offers a potential payout of 19% if the stock is up 27% in a month. Again for a stock up 157%, another 27% is not exactly a high hurdle, and 18 would put the stock back at its prior highs from July and Sept.
I will offer my normal disclaimer for playing earnings with long premium options trades, you need to get a lot of things right to merely break-even, first and foremost direction, then magnitude of the move and timing.