Snap Inc’s (NYSE:SNAP) high mark came at its IPO period, and it has been all downhill since then, down over 60% from the highs. This by itself is not a game over statement. Facebook, Inc. (NASDAQ:FB) also corrected 50% after the IPO pop, but it had an a-ha moment and Wall Street embraced it with gusto.
SNAP has yet to have its a-ha moment, and from the looks of it last night’s earnings report was not it. Management delivered a disaster quarter and investors hated what they saw. The stock falling 20% on the headline. This wasn’t a case of high expectations; the report was bad.
SNAP team missed on every metric and the forward guidance was cautionary at best. You don’t want to hear your CFO say that things will be bad going forward. Furthermore, they used terms like re-acrhitecting and redesigning, these are not words of optimism. In an earnings period where great reports like those from Amazon.com, Inc. (NASDAQ:AMZN) and Caterpillar Inc. (NYSE:CAT) are sold, investors are not going to buy SNAP’s terrible one.
Also, there still is an air of snobishness by management that rubs this investor the wrong way. I believe SNAP made a mistake by declaring itself “a camera company.” It immediately placed itself in competition with every cell phone on the planet. Furthermore, it brought up visions of GoPro Inc (NASDAQ:GPRO) and we all know what happened to the stock there.
I’ve yet to see one pair of Spectacles on the street. If it’s indeed a camera company, I should be seeing more of them — especially since I live in California.
The platform is popular. I know that from my teenage son and his friends. But so far management has not been able to get Wall Street excited about it since its IPO fizzled. Meanwhile, I have traded SNAP a few times but never to chase upside hopium.
So given all the bad news that management delivered last night, I want to reload the same setup as previous trades. The idea is that sharp drops usually shake most of the weak hands hands out of the stock. This gets it closer to support, and therein lies my opportunity. I want to sell into this fear but it is imperative that I choose levels cautiously.
Usually I do this into strong fundamentals. Here I have none tangible so this is definitely a speculative trade inside a conservative portfolio. I do not intend to make it an investment — meaning if the price goes against me I will exit with a loss.
SNAP is likely to set new lows so there is not much help from the technicals. So I will use SNAP options and go as low as possible to successfully weather this earnings report sell cycle.
Snap Stock Trading Advice
The Bet: Sell the SNAP Oct $9 put. This is a bullish trade for which I collect 60 cents to open. I have a 70% certitude that I will retain maximum gains, but if the price falls below my strike then I own shares. I would then need to manage off my breakeven point of $8.40.
Selling naked puts carries big risk, especially for a stock as frothy as SNAP. For those who want to mitigate it, they can sell a spread instead.
The Alternate Bet: Sell the SNAP Oct $9/$8 credit put spread which would deliver over 30% in yield but with much smaller risk. Both setups have about the same odds of success and neither require a rally to win.
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Learn how to generate income from options 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.
