Snap Inc (NYSE:SNAP) burst onto Wall Street with a successful initial public offering. The hoopla leading up to it was grand and SNAP stock fans flocked to it en masse. And then came its earnings …
Snap Inc delivered its first earnings report Wednesday night and traders hated it, driving SNAP stock down more than 21%.
It is also important to note that consensus strongly disliked management’s tone. The experts opined in droves arguing the bull and bear arguments. Most had valid point over SNAP’s outlook, but I think they are all overthinking things.
To me it’s simple: SNAP stock was a highly speculative trade before its earnings report and it continues to be after its earnings report. Nothing has changed except the fact that now those of us who missed the initial public offering have a second chance at an entry point. The fundamentals, regardless of quality, didn’t change overnight and when people bet on a spec company like Snapchat, they shouldn’t expect much for a while.
Click to Enlarge Don’t mistake this for me believing in the company’s success over time. In fact I think that the company will fail to deliver on its promises. Nevertheless, today I am sharing a bullish trade betting that there are enough fans of SNAP stock that it should bounce out of its teenage status in the next few weeks. Today’s setup allows me to be long the stock with little out of pocket as a trade.
The Bet: Buy SNAP Aug $21 call for $1 per contract. To profit, I need price to rally toward my strike. The faster, the better.
To lower my out-of-pocket expense, I will sell downside risk against the IPO price, but with tight stops since I really don’t believe in the fundamentals.
The Bank (Optional): Sell SNAP Aug $16 put and collect $1.11 per contract. By doing this, I am committing to owning the stock at $16 if it falls below it. For a few pennies, I can buy temporary $16 put insurance through May 26.
It is important to note that I won’t let this trade turn into an investment since I don’t believe in the company. SNAP management made a mistake by labeling it a “camera company.” First they put themselves into GoPro Inc (NASDAQ:GPRO) category and we know what that stock did.
Second, by saying they are a camera company they chose to compete with every single cellphone on the planet and a commodity at that. They put Wall Street’s focus on the camera aspect and risk losing sight of the social media service angle.
SNAP stock would have made a good tether to Facebook Inc (NASDAQ:FB) offerings, but since FB was unable to buy it, they get to compete against it. And Zuckerberg will work hard to make it an unfair fight.
E-mail sellspreads@gmail.com with questions or join me to learn more about options in a personal 1on1 webinar 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 on Twitter at @racernic and stocktwits at @racernic.
