Recent IPO stock Roku Inc (NASDAQ:ROKU) just dazzled the Street with its first earnings release as a public company. And ROKU shares are partying like it’s 1999, skyrocketing as much as 56% on the day.
The up-and-coming digital streaming company smashed revenue estimates garnering $124.8 million versus the expected $110.5 million. Though ROKU still lost money for the quarter (10 cents per share), analysts expected far worse.
Today’s rally is reversing the downtrend that has plagued the stock since it went public, which provides plenty of reasons for chart-watchers to give ROKU a fresh look.
With the stock a mere six weeks old, it’s not as if technicians have much meat to chew on, however. We just recently accumulated enough data to calculate a 20-day moving average, but that’s it. Furthermore, because the stock experienced massive volatility in the first two days of its public life ($16 to $30), it has thus far traded between both extremes. So for all its fury, today’s launch was still unable to eclipse the previous peak.
But give it some time, will ya?! If the strength continues, breaking to new heights is inevitable. With ROKU still in its infancy, you better believe volatility will remain elevated. Only a nascent company would see a 50% moonshot on a single earnings announcement.
While I think the path of least resistance is undoubtedly higher after today’s upside surprise, it’s challenging to chase the stock after such an enormous run. Fortunately, today’s trade idea provides plenty of room if the stock ends up pulling back over the weeks ahead.
The Bet-Roku’s-Gap-Will-Hold Trade
With the magnitude of today’s price move, stock traders are going to find it difficult to determine a proper entry point and placement of a stop loss. And that’s why I prefer playing options. Because of the crazy swings in the stock, option premiums are elevated providing big potential profits for traders willing to sell them. Couple that with our overall bullish bias on the stock and a naked put play makes sense.
If you’re willing to bet ROKU will remain above $21 for the next month then sell the Dec $21 put for $1. By selling the put, you are obligating yourself to buy the stock at an effective purchase price of $20 if the put sits in-the-money at expiration.
As of this writing, Tyler Craig held naked puts in ROKU. Want more education on how to trade? Check out Tyler’s trading blog, Tales of a Technician.