Trade Ideas December 8, 2020

MDB Q3 Earnings Preview / Trade Ideas

by Dan

Today after the close MongoDB (MDB) the enterprise software provider will report its FQ3 earnings. The options market is implying about a 9% one day move tomorrow, or about $26, which is rich to its 6.7% average one-day post-earnings move over the last four quarters.

With the stock around $285, the Dec 11th weekly 285 straddle (the call premium + the put premium) is offered at about $26, if you bought that, and thus the implied move between now and Friday’s close you would need a rally above $311 or a decline below $259 to make money.

Shares of MDB are up 115% on the year, and up 200% from its March lows. The stock has gained 30% since the start of November and trading within a couple of percent of its all-time highs. The one year chart below shows the well-defined uptrend the stock has been in since its early August lows, now bumping up against the technical resistance:

 

I suspect that it is an understatement to suggest that expectations are high heading into the print. While expectations are for revenues in the quarter to grow 26% year over year, it is a marked deceleration from last year’s Q3 revenue growth of 68% and from last quarter’s 33%. MDB is not profitable on their $550 million in expected sales this year, the company is set to lose about $70 million on an adjusted basis and over $200 million on a GAAP basis. The slightest hiccup and this stock will be testing $250 on the downside and it will take a meaningful beat and raise for the stock to breakout above the top end of the uptrend in my opinion.

To highlight just how expensive short-dated options are, for those who would be inclined to express a directional view into the print, if you were to target a 10% or so decline down to $255 (vs stock at $285), the Dec 11th weekly 285 – 255 would cost about $10. Risking 10 to possibly make up to $20 if the stock is down 10.5% in two trading days, with a break-even down 6.5% at $275. This is not a great risk-reward.

If I were looking for a sustained pullback post-earnings possibly trending back towards the low-end of the upturned near $235 I might consider the following put spread in Jan expiration:

Bearish Trade Idea: MDB ($285) Buy Jan 280-230 put spread for $15

-Buy to open 1 Jan 280 put for 18.50

-Sell to open 1 Jan 230 put at 3.50

Break-even on Jan expiration:

-Profits of up to 35 between 265 and 230 with a max gain of 35 at or below 230

-Losses of up to 15 between 265 and 280 with a max loss of 15 at or above 280

Rationale: this trade idea risks 5.2% of the stock price, has a break-even down 7%, and a max potential payout of 12% of the stock price if it is down 19% in 5 weeks. For those who think the company could miss and guide down, this trade idea offers some time for a sustained move towards technical support.

 

Playing a stock like this for a breakout after earnings are just not my thing…for those that think the company puts up a big quarter and raises guidance than I suspect defining what you are willing to lose playing for a one-day pop is the play via near the money calls. But my normal disclaimer for long premium short-dated directional plays into events like earnings, you need to get a lot of things right to merely break-even, first and foremost direction, then magnitude of the stock move and of course timing.

Don't miss out!
Be notified of new episodes as they are released
Invalid email address