Dropbox, Inc. (NASDAQ:DBX) reported its first earnings report as a public company last night and the stock is falling 2% on the headline. Luckily for bulls, it came into the event up 12% on the year.
DBX management beat on the top and bottom lines but there were some intricate sticking points. Wall Street wanted to hear clear evidence that paid users percentage of total revenue is increasing fast and they didn’t get it. There were improvements but nothing jaw-dropping so there are no strong bids for the stock this morning.
The company CEO addressed the issues and said that they are partners with great companies like Microsoft Corporation (NASDAQ:MSFT) and Alphabet Inc (NASDAQ:GOOGL) and frankly this is puzzling to me. I use Dropbox because it’s free, but Google is my main service provider.
The CEO noted optimism behind the fact that they have 100 million “potential subs.” Well, this one of 100 million would never pay for DBX services as they stand. If they force me to pay then I would opt out of DBX. Perhaps there is more to this partnership behind closed doors than I see.
Nevertheless, the cloud is a large enough arena to leave room for most providers to prosper. So I think there is a bullish trade to set today. No, since I am not convinced of the slam dunk future prospects, I want to remain cautiously optimistic. So instead of buying DBX shares without any protection, I use options where I can build a buffer zone between current prices and my level of risk.
Technically, Dropbox stock is still setting higher lows so, for now, the bulls have the momentum and onus is on the bears to break it. Since its recent IPO the range is tight and that can serve as a strong base for a swing higher especially if macroeconomic headlines cooperate.
Since DBX still runs at a loss there is no tangible value against which to gauge my levels. But this is a young company still so I won’t let that worry me for now. Instead of value, I use the technical setups to carefully choose risk.
The Bet: Sell DBX OCT $22 put and collect $1.25 per contract to open. Here I have a 75% theoretical chances that price will stay above my level. Else, I will accrue losses below $20.75.
Selling naked puts carries big risk especially for a stock as frothy as DBX. For those who want to mitigate it, they can sell a spread instead.
The Alternate Bet: Sell the DBX OCT $23/$22 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.
Today’s trade, although it would benefit from one, doesn’t need a rally to profit. I merely need DBX stock to hold its support for the next few months. I am betting that the perceived value in the stock will prevent sellers from taking too far. It is important to know that if they do, then I want to own the shares at a discount from 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.
