It was short lived, but the Snap Inc (NYSE:SNAP) rebound off its August lows is over. What’s more, earnings are just around the corner and another post-report plunge could be in the offing. It’s time, once again, to bet against SNAP stock.
Snap is set to step into the earnings confessional in the first full week of November. Currently, Wall Street is expecting a loss of 15 cents per share on revenue of $240.51 million.
The problem is that, even with losses projected, expectations are still too high.
Sure, Snap has roughly 173 million daily active users, but it still has no idea how to effectively monetize them. (Most likely because most of those users are in their teens and are still depending on mommy and daddy’s cash.)
Sentiment, meanwhile, remains excessively bullish for Snapchat stock. According to Zacks data, only four of the 28 analysts following SNAP rate the shares a “sell.” This figure should be much higher given last quarter’s poor fundamental performance.
Click to EnlargeShort sellers agree.
During the most recent reporting period, the number of SNAP shares sold short soared by 10% to 103.9 million shares. This wealth of short interest is only going to grow, as SNAP stock has shown that it has very little buying pressure as the shares approach the $15-$16 region.
What’s more, short sellers aren’t even bothering to hedge their bets this time around.
Currently, the November put/call open interest ratio rests at a lofty reading of 1.42, with puts easily outnumbering calls among those options potentially most affected by Snap earnings.
Checking in with implieds, options traders are pricing in a potential post-earnings move of about 12% for SNAP. This places the upper bound at $16.25, while the lower bound rests at $12.75.
Two Trades for SNAP Stock
Bear Put Spread: With expectations still not inline with Snap’s reality,the stock is in for yet another post-earnings selloff. Traders looking to bet against SNAP stock ahead of earnings might want to consider a Nov $12/$13 bear put spread.
At last check, this spread was offered at 25 cents, or $25 per pair of contracts. Breakeven lies at $12.75, while a maximum profit of 75 cents, or $75 per pair of contracts — a potential 200% return — is possible if SNAP stock closes at or below $12 when November options expire.
Put Sell: If a bit more neutral play better fits your risk tolerance, then a Nov $11 put sell might just fit the bill. At last check, this put was a bid at 15 cents, or $15 per contract. The upside to this put sell strategy is that you keep the premium as long as SNAP stock closes above $11, when November options expire. The downside is that should it trade below $11 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $11 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.