It is astonishing to me that Pandora Media Inc (NYSE:P) is still in business. Its demise has been announced hundreds of times over. Yet here it is, still surviving in spite of giant competitors like Apple Inc. (NASDAQ:AAPL).
But this time it could be different. I have recently installed a Google Home Assistant from Alphabet Inc (NASDAQ:GOOGL). The one feature that I wasn’t looking for but now can’t live without is the music. Like magic, “Okay Google” serves me up music on demand and even if I don’t own it. It’s like having a DJ at home but without the cheesy voice-over emcee riffs. So if I were paying for a music service prior then I would have canceled it.
And therein lies the danger for P stock. So having made my statement, you’d think that today I am going to short Pandora stock but I am not. I think that a stock that survives for so long will find a way to continue existing or get bought out.
Click to Enlarge However, I am not as reckless as to buy Pandora stock outright without any protection. Then I’d be risking $5.50 without any room for error. Instead, I will use options so I can build a moat around my trade.
The idea is that even if P continues to fall, it will reach a point where it becomes a takeout target. So the worst case scenario for me would be to temporarily own the shares at a discount. I am confident that should that happen, I will be able to manage my risk accordingly.
Fundamentally, I cannot measure any tangible value from the price to earnings ratio. But its price to book is 3.14. That is a value against which I can sell downside risk and could create income.
Unfortunately for those who are already long P stock, it’s now trading 50% below the average price target on Wall Street. While this could mean that there is a lot of upside potential, to me that could spell trouble.
The longer it stays this low, the more likely it is that analysts will adjust their targets. Luckily, most don’t expect much of it from a rating perspective. Nevertheless, we could get a surprise downgrade.
So I consider today’s trade as a speculative bet — emphasis on “bet” — inside a conservative portfolio. It would be smart to keep the risk size to an amount that won’t break my heart or the piggy bank.
While the buffer from current price is large, the statistical chance of success is a lot lower than my normal preferred starting point.
The Bet: Sell P Jan 2019 $5 put and collect $1.10 cents per contract to open. Here I have a 60% theoretical chances that price will stay above my level. Else, I will accrue losses below $3.90.
Selling naked puts is daunting especially in a stock that is in freefall and near all-time high stock markets. Those who want to mitigate that risk can sell spreads instead.
The Alternate Bet: Sell P Jan 2019 $5/$3 credit put spread. The spread has the same odds but would deliver more than 40% yield on risk. Neither trade requires a rally to profit.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose
Get my newsletter for free 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 as @racernic on twitter and stocktwits.
