Last night, Dropbox (NASDAQ:DBX) reported earnings and there was after-hour jubilation but it died quickly. DBX stock is down 7.5% in early morning trading.
Luckily for the bulls, coming into the earnings event, DBX stock rallied 30% in the past seven days. So booking profits on the news does not drastically change things. And therein lies the opportunity.
A sharp profit-taking dip in DBX stock may break the upside momentum, but it doesn’t necessarily dictate a sustained reversal. Drops are normal facets of an ascending chart.
I was lucky enough to be long Dropbox stock since Aug. 1 and I closed it ahead of the report because I feared the binary outcome of earnings reports.
Last night, management delivered big beats on the top- and bottom-lines. Revenues grew 27% year-over-year. DBX now has almost 12 million paid users — a 22% increase. So for now, it looks like the company is successfully implementing its plans.
Maybe that is why DBX stock investors are a bit worried about the departure of the company’s Chief Operating Officer. But those usually are temporary concerns. In most cases, a company’s plans are bigger than one person. After all, Apple (NASDAQ:AAPL) did survive the early and sad departure of its founder Steve Jobs and it has just crossed the $1 trillion market cap.
Fundamentally, since Dropbox stock is a young growth stock, so there is no tangible value from the traditional sense. So for now, I assume that they are headed in the right direction.
I personally have used Dropbox services for years, but have yet to contribute a dime to their sales. In fact, the minute they ask me to pay, I would cancel them. I get similar services from Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) gmail.
Technically, the recent violent 30% rally ahead of earnings not only delivered me call profits, but it also set the support levels. Since I already booked my call profits ahead of the earnings event, I now can catch the proverbial falling knife with kid gloves.
How to Trade DBX Stock on This Dip
I do this using options. I am not one to buy the stock outright, with no room for error, requiring hope for a rally in order to profit. The stock markets are near all time highs.
Using options, today I sell downside risk into what others fear to create income with no out of pocket expense. There is proven support against which I can bet for profit. From here, I have more faith in that to hold into 2018 than in the upside appetite for Dropbox stock.
The Bet: Sell the DBX JAN 2019 $22 naked put for $1. This is a bullish trade, where I have an 80% theoretical chance for maximum gains. Otherwise, I will own shares and accrue losses below $21.
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 JAN 2019 $22/$20 credit put spread where I have about the same odds of winning, but with much less risk. The spread would yield 15% if successful.
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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.