Snap Inc (NYSE:SNAP) was August’s unlikeliest comeback stock. The Snapchat maker reported earnings in early August that missed expectations, while daily average user growth proved to be almost nonexistent. And yet, SNAP stock managed to gain 5.6% in August — up an amazing 34% from its post-earnings lows.
As a result, it didn’t matter whether you took a bullish or bearish approach to SNAP options last month. In an odd twist of fate, both the Aug $13.50/$14 bull call spread and the Aug $11.50/$12 bear put spread hit their maximum profit targets. (Albeit, you had to be on the ball to claim a maximum profit on the bear put spread).
For traders on the bull call spread, all you had to do was close out your position on Aug. 18 (when the contracts expired) to realize a potential maximum return of about 157%. SNAP bounced around $14 heading into expiration and traded north of the sold $14 call for most of that Friday.
For traders on the bear put spread, the post earnings reaction was exactly as I noted it could be following such a weak earnings report. SNAP stock plunged below $12 immediately following earnings, and dipped below the sold $11.50 put on Aug. 14.
Breakeven on the trade was $11.85 (as of the morning of my commentary), so traders getting in at or near those prices had nearly a day and a half to rake in profits — potentially netting you a 133% return if you timed your exit right.
SNAP’s post-earnings plunge was to be expected. The company completely botched its second-quarter earnings report. SNAP’s 34% surge after hitting bottom, however, has been equally as shocking.
Shocking, but not that hard to explain. SNAP stock was already trading near oversold levels when the company entered the earnings confessional. The post-earnings plunge pushed the shares further into bargain territory. Once the panic selling was over, bargain hunters moved in to take advantage.
What’s more, sentiment had reached a bearish extreme following earnings. With SNAP stock trading at depressed levels, those bears moved to take profits off the table.
Short sellers were most notable, with short interest declining sharply in the wake of Snap Inc’s earnings. The end result was a bull run off all-time lows, fueled by profit-taking and bargain hunting.
Click to Enlarge SNAP’s rally has now become a technical affair. The shares broke above former technical resistance at $15 yesterday. What’s more, SNAP also closed north of its 50-day moving average and has pulled its 10-day trendline into a bullish cross of its longer-term counterpart. All three of these indicators have bullish short-term implications for SNAP stock.
And there’s still more bearish sentiment to unwind to help drive this technical rally. Zacks data indicates that 19 of the 28 26 analysts following SNAP stock rate the shares a “hold” or worse, leaving plenty of room for upgrades.
Furthermore, there is still plenty of SNAP short interest to unwind. With SNAP breaking above its 50-day trendline, more short-sellers may look to take profits while they have a chance.
Judging by SNAP’s October options configuration, very few of these short sellers are actually hedged — which could exacerbate the situation. Currently, the October put/call open interest ratio rests at 1.36 for SNAP, indicating a high preference for puts over calls among back-month speculators.
According to SNAP’s option implieds, a big move for the stock is in the cards. October implieds are currently pricing in a potential move of about 14.5% for SNAP stock heading into expiration. This places the upper bound at about $17, while the lower bound resides at $13.
2 Trades for SNAP Stock
Call Spread: Traders looking to profit from a continuation of SNAP’s technical rally might want to consider an Oct $16/$17 bull call spread. This spread lies within SNAP stock’s expected move through October expiration.
At last check, the Oct $16/$17 spread was offered at 29 cents, or $29 per pair of contracts. Breakeven lies at $16.29, while a maximum profit of 71 cents, or $71 per pair of contracts — a potential return of 144% — is possible if SNAP stock closes at or above $17 when October options expire.
Put Spread: If you’re not buying into the SNAP hype, or if you believe the shares are set to reverse following their recent run, then an Oct $13/$14 bear put spread has potential.
At last check, this spread was offered at 26 cents, or $26 per pair of contracts. Breakeven lies at $13.74, while a maximum profit of 74 cents, or $74 per pair of contracts — a potential return of about 184% — is possible if SNAP stock closes at or below $13 when October options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
