How to Trade the Snap Inc Oversold Bounce

When we last looked at Snap Inc (NYSE:SNAP) in mid-October, I talked about the company’s issues with monetizing its user base. You see, Snapchat is quite popular with teens — more popular than even Facebook Inc (NASDAQ:FB) and its Snapchat clone Instagram. The problem is that teens don’t have a lot of disposable income, and, quite often, neither do their parents.

SNAP Inc: How to Trade the Snap Inc Oversold Bounce

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Back in October, I recommended a Nov $12/$13 bear put spread to take advantage of weakness in SNAP stock — weakness that would appear after the company reported earnings in November when this monetization issue would rear its ugly head. Hopefully you didn’t let that little pop to the $16 area shake you out of your position. Even more hopefully, you got a better entry price on the trade because of it.

SNAP stock
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The potential return on the Nov $12/$13 bear put spread was roughly 200% if SNAP closed below $12 when November options expired. They expire this Friday. Taking my entry price of 25 cents, or $25 per pair of contracts, you can (and likely should) close that trade out right now for a more than 100% gain.

Now, I haven’t suddenly turned bullish on Snapchat stock. However, the shares do have some short-term upside ahead of them as the broader market trends higher into the end of the year. It’s a seasonality thing.

What’s more, SNAP stock is awfully close to oversold levels and is sure to attract a few bargain hunters. Regardless of how bad Snap’s earnings were, there are always more than a few bulls looking to bet on a short-term bounce.

In fact, that’s where I find myself at this point when looking at SNAP’s near-term prospects. I still don’t like the company, but SNAP stock has room to drift higher before it hits any significant resistance.

Technically speaking, that resistance lies near $14, with SNAP stock’s 20-day and 50-day moving averages quickly descending into the region. That’s a considerable amount of near-term upside before Snapchat stock reverses course once again.

Meanwhile, SNAP’s sentiment backdrop reveals a wealth of pessimism. No fewer than five brokerage firms downgraded SNAP stock following its quarterly earnings report, with Morgan Stanley even calling out Snapchat’s inability to monetize its user base.

Overall, Zacks reports that 23 of the 28 analysts following SNAP stock rate the shares a “hold” or worse. While this negativity is to be expected, it does leave the door open for potential valuation upgrades or price target increases due to the low expectations.

After all, SNAP stock halved its more than 20% preopen decline to after news that Chinese firm Tencent Holdings Ltd. (OTCMKTS:TCEHY) has taken a 17% stake in SNAP Class A shares. Another tidbit like that could spark a considerable short-term rally for Snapchat stock.

As for SNAP stock options traders, the December put/call open interest ratio rests at 0.89, down sharply from its pre-earnings perch at 1.42. As such, it’s clear that speculative traders are already looking for a rebound from heavy earnings-related losses.

Checking in with implieds, December options traders are pricing in a potential move of about 9% for SNAP stock heading into expiration. This places the upper bound at $13.65, while the lower bound rests at $11.35.

2 Trades for SNAP Stock

Bull Call Spread: Is SNAP a good buy? No. But SNAP stock has the potential to be a good short-term bullish play, given rock-bottom sentiment and an oversold condition. Traders looking to bet on a bounce might want to consider a Dec $13/$14 bull call spread.

At last check, this spread was offered at 27 cents, or $27 per pair of contracts.  Breakeven lies at $13.27, while a maximum profit of 73 cents, or $73 per pair of contracts — a potential 170% return — is possible if SNAP stock closes at or above $14 when December options expire.

Put Sell: Once again, a more neutral play may be the better option if you’re not sold on SNAP stock’s short-term price action. As such, a Dec $11 put sell should fit the bill. At last check, this put was bid at 27 cents, or $27 per contract.

The upside to this put sell strategy is that you keep the premium as long as SNAP stock closes above $11 when December options expire. The downside is that should SNAP 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.

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