Roku Inc Stock’s Violent Earnings Reaction Is a Terrifying Opportunity

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Roku Inc Stock’s Violent Earnings Reaction Is a Terrifying Opportunity

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Roku Inc (NASDAQ:ROKU) reported earnings last night and traders hated it — the stock is down massively. So it is safe to say that even though they beat forecasts, they were not in line with expectations. So today’s trade is clearly a case of catching a falling guillotine and not an ordinary knife.

This week’s ROKU options markets were pricing in a massive potential move ahead of the earnings, and the move did not disappoint from that sense. I’ve seen this happen in other momentum speculative stocks and after the initial shock wears off, cooler heads prevail and traders go back to look for potential.


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For now and even though ROKU over-delivered on its promises, investors are disappointed by the forward guidance. Management cited operational excuses for being cautious which include NAND inventory and price cuts. All told, they did not wow Wall Street, and on a week where markets are nervous, the punishment is severe.

Usually I like to risk my money where I see value. However I do need speculative trades in my portfolio and ROKU is one for me on this dip. In the absence of tangible value from the traditional sense, today’s trade on this hated stock is merely a bet on price action.

The closer ROKU stock gets to its initial public price offering the more likely it will be either for a takeover or for buyers to step in. U.S. corporations suddenly find themselves with repatriated cash that they need to put to work so this could be on someone’s shopping list.

I will not buy the shares outright and hope that they will rally so I can profit. Instead I will use ROKU options, where I can leave room for error. With my style of trading it is important to choose the correct levels where to place the risk.

Technically, there are two clear zones in ROKU stock. Above $50 per share it saw resistance versus a band of support below $37 per share. Current market volatility is high. The CBOE Volatility Index (VIX) levels mean that the premiums I sell today are inflated. So when the VIX eases, I will immediately benefit from that all else held equal.

ROKU Stock Trade Idea

The Bet: Sell the ROKU JUL $22 put for $1.70. Here I have a 80% theoretical chance of success. Otherwise and if the price falls below that level then I would suffer losses below $20.30.

Selling naked puts carries big risk, especially for a stock as frothy as ROKU and in a nervous market. For those who want to mitigate it, they can sell a spread instead.

The Alternate Bet: Sell the ROKU JUL $22/$20 credit put spread where my risk is limited. Yet if the spread wins would deliver 15% in yield.

Today’s trade, although it would benefit from one, doesn’t need a rally to profit. I merely need ROKU stock to hold its support for the next few months.

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.

Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2018/02/roku-inc-roku-stock-violent-earnings/.

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