Overstock.com Inc (NASDAQ:OSTK) reported earnings last night, and the stock slid 3.5% on the headline. It is still is looking red this morning.
Management delivered better results than last year, but they missed Wall Street expectations so investors are expressing their disappointment with another negative reaction to the earnings event. Hopefully this time the follow-through is going to be better than last time, where the selling got worse in the weeks to come. But I bet that selling was mostly in lockstep with the stock market in general — and therein lies my opportunity.
Today’s bet is just that: A bet that the floor will hold once again in OSTK. I am not here to argue for great operation in this once-ailing retailer. This is a pure bet that it will once again find footing, as there is a consolidated zone below the current price that should be support. This is a rinse-and-repeat trade for me from the last earnings report.
Amidst the popularity of Bitcoin, OSTK management saw an opportunity and announced that they would be players in the crypto-arena. Good thing at that, since it’s failing as a retailer. It is in the direct line of fire from Amazon.com Inc. (NASDAQ:AMZN).
Marketing initiatives are taking longer than expected to bear fruit. They are also trying to shift sales into higher-margin items to offset rising expenses. Management even blamed changes in Google’s algorithms for their sales woes.
So they are spending a ton on marketing and technology and it’s still not getting them to their goals, and this is concerning. The investor reaction is justified but I still see an opportunity to create income from the long side on Overstock stock.
No, I won’t buy the shares outright and risk $36 without any room for error. Instead, I will use OSTK options, where I can create a pad between current prices and my risk. I have done this before with easy success in spite of continued macroeconomic adversity like the tariff war headlines and more.
I usually like to sell risk into fear … but for stocks that have value. Clearly, in this case, the fundamental story in OSTK is speculative at best, so my bet is purely technical. There I see a well-consolidated zone below $32 per share. These usually act as support on the way down. This battle dates back to September of 2017.
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OSTK Stock Trade Ideas
The Bet: Sell the OSTK Sep $20 naked put. This is a bullish trade where I collect $1 to open. Here I have a 80% theoretical chance of success. But if the price falls below my strike then I accrue losses below $19.
Selling naked puts carries big risk, especially for a stock as frothy as OSTK. For those who want to mitigate it, they can sell a spread instead.
The Alternate Bet: Sell the OSTK Sep $22.50/$20 credit put spread. The spread has the same odds but would deliver 25% yield on risk. Neither trade require a rally to profit.
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.
