Snap Inc (NYSE:SNAP) has spooked bulls into hiding and allowed bears to go “Boo!” with plenty of scary narratives of late. However, business concerns aside, SNAP stock isn’t about to disappear. In fact, shares look very attractive for shorter-term, contrarian traders using a positioned butterfly spread. Let me explain.
I’ve said it before, but it bears repeating. I’m far from being a big supporter of Snapchat’s longevity. But, as a Gen X’er still clinging to my relic iPhone 5, that shouldn’t come as much of a surprise. Yet, these days there also appears to be much less enthusiasm for the Snap app among its bread-and-butter demographic Millennial base.
Blame SNAP stock’s problems on what you will, but it probably comes down to a combination of factors such as an “annoying” interface change, increased and irritating advertising as Snap has matured, and let’s face it, too many “fun” new apps vying for the younger generation’s attention and no love lost ending that relationship with the push of a button. “Poof!”
Nevertheless, let’s remember and respect the short-term whims of the market and its ability to often defy logic. Bottom line, it’s our view that today’s overall heavy bearishness off and on the price chart of SNAP stock puts tomorrow’s ghost of a company in a strong position to successfully levitate against the consensus in the here and now.
SNAP Stock Daily Price Chart
When I last wrote about SNAP stock in February immediately in front of earnings, shares were setting up quite nicely as a contrarian play on the price chart. The subsequent bullish reaction to Snap’s corporate confessional was undoubtedly fueled by some combination of extreme bearish pessimism, bullish secondary divergences and a higher low pattern previously laid out for readers.
While the outlook was for higher Snap stock prices, what was unexpected was the sheer magnitude of the move. Snap has gone on to amaze this strategist further by taking back the entire earnings reaction over the last two months. That being said, SNAP does appear to be in position, once again, as a shorter-term play for bullish contrarians.
In our view, the gap fill — a completion of a Fibonacci-based mirror move or two-step pattern from the February high (AB = CD), additional support from a bullish stochastic configuration and another higher low now in place — combine to support a decent spot to play the stock using a bullish, near-term SNAP options strategy.
SNAP Stock Moderately Bullish Butterfly
Reviewing SNAP’s options, one favored play for bulls remains a moderately bullish long call butterfly. Specifically, the 4’ May $15 / $17 / $19 call combination for 33 cents with shares of Snap at $14.80 is attractive.
The pricing allows for a profit range of $15.33-$18.67 at expiration with the max payout of $1.67 if SNAP stock landed squarely at $17 in a bit less than a month’s time.
The risk with using this type spread as a bullish play is if SNAP is above the $19 or below the $15 call, as the trader will concede the small debit of around 2%. The good news is this contract avoids the next earnings cycle and, as we learned, sometimes excessive gap risk while still allowing sufficient time for a bottom to form and shares to rally.
Lastly, as the market can be a jokey creature at times, it wouldn’t be a stretch to anticipate Snap stock moving back towards the initial earnings gap trading low of $16.96, with both bears and bulls anxious immediately in front of earnings — and this butterfly trader already sitting pretty with outsized profits.
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.
