The Snap Inc (NYSE:SNAP) boom/bust cycle has taken investors on quite a ride during the past year. The company has enjoyed periods of positive sentiment following subscriber growth, as well as bearish periods due to an unwelcome app redesign.
Today, I take a look at SNAP stock’s current position in this boom/bust cycle and how you can profit from it once again.
The most recent boom/bust cycle for SNAP stock took place rather quickly. On Feb. 7, Snapchat stock rocketed more than 40% after the company crushed quarterly earnings expectations. The shares ultimately topped out near $21 before profit taking set in. SNAP bounced off support near $18.50 before once again rising to test resistance near $20.
The $20 level is crucial to SNAP stock’s continued rally, as it would indicate sentiment tolerance for higher prices. However, a single tweet from Kylie Jenner blew short-term sentiment hopes out of the water.
Admittedly, Jenner’s tweet wasn’t the main reason for SNAP stock’s decline. Unrest had been building since Snap redesigned its app. Users were not happy, and Jenner’s tweet was merely the straw that broke the camel’s back.
Click to EnlargeAs a result, Snapchat stock dropped to the $16.50-$17 region, triggering many bullish investors to buy.
After all, Snap still has continued user growth and is finally figuring out how to effectively monetize its platform. This, combined with the decline in Facebook Inc (NASDAQ:FB) users sets a bullish stage for Snapchat stock going forward.
With SNAP stock now out of the bust phase, the shares are poised to rally higher over the short-term. Providing additional fuel for this rally, technical buyers may step in now that SNAP’s 50-day moving average has formed a bullish cross with its 200-day trendline.
Resistance near $20 and $21 remains a concern, but, with the right trade, we can still capture significant short-term gains.
Snapchat stock is poised for potential upgrades or price-target increases from the brokerage community. Thomson/First Call reports that only six of the 36 analysts following the shares rate them a “buy,” even after last month’s impressive earnings.
Furthermore, SNAP stock short sellers are fleeing the shares. Short interest declined by 24% during the most recent reporting period. Continued short covering should provide additional buying support for Snapchat stock. And there is plenty of short interest to cover, with 14.5% of Snap’s float still sold short.
Finally, SNAP stock March options implieds are favorable for a short-term position. Currently, implieds are pricing in a potential move of about 6%. This places the upper bound at $19.30 and the lower bound at $17.20.
Two Trades for SNAP Stock
Bull Call Spread: With SNAP stock on the way higher once again, it’s time to bet bullish. However, we must keep in mind that resistance lies overhead in the $20 region. Giving ourselves a little wiggle room, the Mar $19/$19.50 bull call spread offers a potentially sizable opportunity for profit.
At last check, this spread was offered at 12 cents, or $12-per-pair of contracts. Breakeven lies at $19.12, while a maximum profit of 38 cents, or $38-per-pair of contracts — a potential 216% return — is possible if Snapchat stock closes at or above $19.50 when March options expire in about two weeks.
Put Sell: For a more neutral play on SNAP stock, traders might consider a Mar $17 put sell. The $17 region has emerged as solid support for Snapchat stock, holding the shares in check after the Kylie Jenner incident. As such, it should hold firm heading into expiration.
At last check, this put was bid at 22 cents, or $22 per contract. The upside to this put sell strategy is that you keep the premium as long as Snapchat stock closes above $17 when March options expire. The downside is that should SNAP trade below $17 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $17-per-share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.