Earnings were anything but the sound of music to the ears of Spotify Technology SA (NYSE:SPOT) investors Thursday. But if you’re going to be an immovable bull in the face of mixed evidence off and on the price chart, a fairly optimistic, well-placed SPOT options strategy is worth your consideration. Let me explain.
It wasn’t a good session for Spotify stock. Shares tumbled nearly 6% Thursday following a mixed, but mostly concerning first corporate confessional from the streaming music upstart whose shares went public a month ago.
The most noise raised by investors over the Spotify’s Q1 earnings report had to do with a trio of disappointments. Hopes the company’s pre-IPO guidance would prove conservative failed to be confirmed by Thursday’s quarterly sales figures.
Additionally, Spotify stock’s report re-raised concerns that revenue growth will continue to lag behind subscriber growth. The results also reopened the conversation of a compression on margins given its business model and the competition the company faces.
Like Netflix, Inc. (NASDAQ:NFLX), Spotify is a highly popular service and does enjoy a good deal of stickiness with its enviable subscriber base. But the similarities stop there, and Netflix’s ability to push price hikes on its customers and stronger earnings power is going to be very difficult for Spotify to emulate.
Unlike the original movies and television created by both Netflix and Amazon.com, Inc. (NASDAQ:AMZN) — content that has proven to be a very successful formula for both companies — Spotify doesn’t boast that kind of muscle with its content medium. That means the buck literally stops there.
Additionally, Spotify faces heady competition from Amazon, Apple Inc. (NASDAQ:AAPL) and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), all of whose pockets are much deeper and can undercut the market on pricing. And that could spell trouble for SPOT stock.
In a way, Spotify reminds this strategist more of Fitbit Inc (NYSE:FIT) and its woes, and SPOT is enjoying similar success. Heck, what’s to stop Netflix from entering the music market as well and trying to dominate another form of media?
Spotify Stock Daily Chart
Spotify stock’s ballyhooed initial public offering, which just two days ago finally eclipsed its opening day high, turned into another sort of “IPO” where investors pulled out of shares yesterday. In all fairness though, it could have been a lot worse.
At the end of the day, and quite literally at that, shares of SPOT did cut the session’s decline in half and finished near the session high. As well, Thursday’s low did manage to hold support in-between the 50%-62% retracement levels and maintain a higher-low on the price chart.
Looking forward, you could say the technical case has been made for Spotify stock bulls. And to some degree it has. However, I’d personally be careful given the challenges off the price chart. I’d also be aware that if SPOT’s technical supports fail; Thursday’s drop could be just the beginning.
Spotify Stock Bullish Combination
Unlike myself, if you’re going to buy into SPOT’s mixed bag, I’d suggest using a moderately bullish long call butterfly position instead of buying Spotify stock. This strategy can capture a nice size profit range, enjoy substantial returns on investment and unlike shares, and do so with vastly reduced and limited risk.
One favored combination of this type is the June $165/$180/$195 call butterfly. With SPOT at $160.38 the spread is priced for $2.70. This allows for a profit zone between $167.70 and $192.30 and boasts a maximum return of $12.30 if shares landed on $180 at expiration.
If this strategy is executed, SPOT bulls do need to recognize the risk of forfeiting the entire debit if Spotify stock manages to overshoot the $195 strike call. The dollar cost of this exposure is small, but nonetheless it does exist for this bullish range-bound strategy.
That said, given what’s been discussed off the chart, this unwanted event is a full 20% above the current price on the Spotify stock chart and the spread falls outside the earnings cycle — that’s a compromise worth your consideration in our opinion.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities 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.