Pandora Media Inc (NYSE:P) stock is down 35% since December as its ongoing will it-won’t it haggling with prospective buyer Sirius XM Holdings Inc. (NASDAQ:SIRI) drags on. However, P stock is starting to put together a small recovery, and is worth a look from a trading perspective.
Although I cannot fiercely defend Pandora’s fundamentals, I can at least say that it’s still standing in spite of the naysayers.
The list of Pandora’s competitors is impressive. It includes names like Alphabet Inc (NASDAQ:GOOGL), Apple inc. (NASDAQ:AAPL) and Amazon.com Inc (NASDAQ:AMZN). When a relatively small company is competing with true giants, they are not supposed to last this long.
Is this the time where prices finally go to zero? Hardly. If Sirius XM doesn’t jump in, both Verizon Communications Inc. (NYSE:VZ) and KKR & Co. L.P. (NYSE:KKR) are willing investors. So I want to bet that the lows in Pandora stock will hold once more.
This is a speculative trade — it’s high-risk and low-conviction. Thus, the risk size won’t be big enough to break my heart or my piggy bank.
I have traded P stock before, but it was while I was anticipating a technical breakout. This time it’s different. I want to sell downside risk against support levels that have held for the last four years. Usually, I like to sell risk that has a theoretical chance of success near 90%. In Pandora’s case I want to merely bet that the $7 lows will hold through January. If I am wrong, I might need to own the stock.
Technically speaking, there is not much to forecast except to watch how price behaves around $8, then $7 if needed. I could buy shorter-dated cheap sacrifice puts to temporarily safeguard against crash scenarios.
How to Trade P Stock
The bet: Sell the Jan 2018 $7 naked put and collect 60 cents per contract. Here I have a 65% theoretical certainty that I will retain my maximum profit. Otherwise, if Pandora’s price falls below my strike, I own the shares and will suffer losses below $6.4.
Selling naked puts is risky since the downside is open until zero. For those who prefer a more finite risk, use spreads instead.
The alternate bet: Sell the $7/$6 credit put spread, where I have the same theoretical chance of success but with much less risk exposure.
This spread could ideally deliver 30% in yield from P stock, which is a much better bet than risking $9.40 per share with absolutely no room for error, then crossing your finger and hoping Pandora shares surge 30% higher from here.
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.
