After getting obliterated last week following a dismal earnings release, Snap Inc (NYSE:SNAP) shares are making a comeback. SNAP stock is closing in on a 10% gain thus far in Monday’s midday trading.
It’s quite the rebound for a stock that was left for dead a mere two trading sessions ago.
But is this rally a buy? Or is it destined for failure? Here are a few things to consider in grappling with said questions.
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First, for all its fury, the rebound in SNAP has still only retraced about 60% of its post-earnings gap. Much work remains before shares fully recover from last week’s sucker punch.
Second, bargain hunters in search of a deal following the bludgeoning in SNAP stock last week should have already purchased. The risk-reward tradeoff at this stage is no good. The stock is now up almost 20% since last Thursday’s alone.
Third, resistance aplenty looms overhead. The lower pivot low formed by the recent free-fall officially pushed the stock into a downtrend. It now rests beneath its 20-day and 50-day moving averages, which makes the current rally highly suspect. In fact, shares already look like they’re starting to arch lower here in the early afternoon.
Any further rally from here simply creates a more attractive short trade setup for Snap.
How to Trade Snap Stock Here
If you’re looking for a high-probability play to capitalize on SNAP’s inability to fully recover from last week’s swan dive, try selling June call options.
Sell the June 23 calls for 40 cents or higher. The potential reward of 40 cents will be captured if the stock sits below $23 at expiration.
By selling the call, you obligate yourself to short shares at an effective cost basis of $23.40. If you don’t mind being short the stock at that price, then ride the option to expiration and allow assignment if SNAP stock is above $23. Otherwise, you could buy back the calls to minimize the loss if shares rise above the short strike of $23.
As of this writing, Tyler Craig held bearish option positions in SNAP.
