Much of the buyout air came out of the Pandora Media Inc (NYSE:P) balloon yesterday as it became clear that Sirius XM Holdings Inc. (NASDAQ:SIRI) was not going to buy out the streaming music company. The impact was grave, as the stock fell 3%. There initially some positivity this morning over the idea of Sirius XM still investing some money, but Wall Street’s bullishness is fading, and so is P stock into the afternoon.
Looking at the long-term chart of Pandora, it’s easy to see why some would label it a falling machete. But the cheaper it gets, the duller the blades — less risk for those who want to try to catch it.
Those are the perils of chasing price performance based on acquisition headlines.
Today, I want to add some speculation to my portfolio. So I will set up a trade on P stock to benefit from near-term chatter and headlines. I won’t chase performance, but I will bet against lower prices.
Even before the Wednesday drop, Pandora stock had already been down to bare bones. It had corrected 35% since December. Selling out of it now sounds like a potential mistake.
The very existence of Pandora has always been a debate ever since the entries of gorilla competitors like Alphabet Inc (NASDAQ:GOOGL), Apple inc. (NASDAQ:AAPL) and Amazon.com Inc (NASDAQ:AMZN). So a little extra air leaking out of the hopium balloon is not unusual.
Click to Enlarge Statistically, this trade is very close to a coin flip, which is not how I usually use options. But in this case, I am literally betting that the dip we just had marks a short-term low.
How to Trade P Stock
The bet: Sell the P Jun 30 $8 put and collect 50 cents and commit to owning shares if the price falls below our strike. We’ll accrue losses below $7.50 per share.
Only do this if you’re willing and able to own Pandora shares at $8. But since we’d also keep the premium, we should have time to manage out of the position for profit.
Sirius XM and Verizon Communications Inc. (NYSE:VZ) are two potential investors (and I still believe potential buyers) of Pandora. I think the list is long enough that we’ll get some more pops from positive speculative headlines. Those bounces will help us profit, even if the put position fails and I end up owning the shares.
Trading options is risky business. Never risk more than you’re willing to lose.
Learn how to generate income from options 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.
