As Wall Street readies itself for the worst from Snap Inc (NYSE:SNAP), this strategist can’t help but see a low-risk and moderately bullish options spread on SNAP stock as a solid contrarian play in front of earnings.
Let me explain.
Let’s get this out in the open. I’m far from being a big supporter of Snapchat’s longevity and I can’t say I even find its photo sharing app as amusing enough to even take up the tiniest bit of storage space on my iPhone.
Now for another important disclosure: I’m also the guy with an almost ancient iPhone 5 and just 16GB of memory, so you be the judge. But while I may be behind the times in some areas or simply too old to get it, I can’t turn a blind eye to SNAP stock’s bullish short-term prospects.
Bottom-line, with Wall Street decidedly bearish on SNAP stock with a very stiff 9 sell recommendations, even the ‘more neutral’ views in the analyst community sounding downright negative and high short interest in excess of 30%, Snapchat is far from popular. And coupled with what I’m seeing on the SNAP stock chart; that one-sided sentiment could work in favor of bullish contrarians.
SNAP Stock Daily Price Chart
When I last wrote about SNAP stock in late November, a couple weeks after a bearish earnings reaction, the technical prognosis didn’t look good for bulls. In fact, I warned of an inverse cup with handle, which appeared to set up shares of Snapchat for a breakdown to fresh lows.
I was wrong.
SNAP subsequently broke the bearish pattern’s handle and worked its way higher. But the bulls also failed to follow-through. Shares reversed lower for a second straight time below SNAP’s $17 IPO price and have been trending lower for almost two months. But I’m not bearish at the moment.
Shares of Snapchat are now trading inside last quarter’s immediate earnings reaction and putting together a higher low support pattern confirmed by a bullishly divergent stochastics setup. It’s bullish and combined with the discussed bearish sentiment, SNAP stock looks like a compelling play for shorter-term contrarians in front of Tuesday night’s earnings release.
SNAP Stock Moderately Bullish Butterfly
Reviewing SNAP’s options, one favored play for bulls is buying the Feb $15 / $17 / $19 call butterfly for up to 26 cents with shares at $13.71. The spread offers a healthy profit zone from $15.26 to $18.74 with low risk exposure of about 2% of Snapchat stock. As well, there’s a max payout of $1.74 at $17 near the prior technical failures, should SNAP finish there on expiration.
The risk with this type position for a bullish trader is the small debit is fully at risk below $15 or above $19. Thus, if a potential rally is too weak or if SNAP exploded higher above the butterfly, this trader will sacrifice the cost of the spread.
Bottom-line though, if you’re like me and see SNAP as a decent contrarian opportunity, but believe an earnings reaction above the spread is still highly unlikely and also don’t want to expose yourself to larger downside risk in the event the rest of Wall Street is correct, this butterfly offers a nice blend of risk-to-reward.
Disclosure: Investment accounts under Christopher Tyler’s management do not own any securities or derivatives of companies mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. . For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
