Off and on the price chart of Grubhub (NYSE:GRUB), the time is right to nibble. But bullish investors may want to order an out-of-the-money call spread from the GRUB stock options menu in order to gorge on big profits with defined and reduced risk. Let me explain.
Online food delivery operator Grubhub surged last week by more than 22% to record highs. Investors gobbled up the company’s much-stronger-than-expected second-quarter results. Items driving the enthusiastic action included GRUB’s above-views, year-over-year revenue growth of 51%, higher-than-forecast 70% increase in Grubhub’s 15.6 million active diners, an earnings beat of 8 cents on profits of 50 cents, as well as an upbeat above-views outlook.
But if you think you’ve missed the bus with GRUB stock, think again — or better yet, look at Grubhub’s delicious price chart and then use options to guard against any potential undesired bouts of indigestion.
GRUB Stock Weekly Price Chart
At last week’s excited highs, GRUB was up nearly 200% since shares broke out one year ago from a lengthy corrective base that spanned more than two years. Early on in the uptrend GRUB stock carved out a couple small bases for bullish investors to position from without much difficulty. But it’s been a bit more challenging in recent days.
Over the past five months Grubhub shares first established a failed cup base breakout much to chagrin of many investors using a money stop of 7%-10% below the pattern buy point. Ouch!
From the initial price pinch, to the chagrin of those GRUB stock bulls, shares quickly reversed higher to form a base-on-base formation. You can almost hear them muttering, “Why didn’t I hold!” But the icing on the cake was last week’s breakout buy signal, which triggered immediately during GRUB’s frenzied post-earnings gap and thrust pattern. “Dang!”
To say the least, Wall Street wasn’t serving a free lunch in GRUB stock.
The good news today is GRUB has worked off its volatile and overbought earnings reaction. Shares have retraced 61% of the move as of Tuesday’s close while testing the prior base and all-time-high in a simple multiday pullback pattern. Even better, by Wednesday’s closing bell shares had confirmed the supportive price action by holding the low and slightly penetrating the prior candle’s high of $125.59.
GRUB Stock Bull Call Spread
For investors who want to nibble on the pullback pattern described above, but do so with less risk in the event GRUB stock’s more volatile side rears its head again, an out-of-the-money bull call spread is a favored approach.
This type of spread requires Grubhub to confirm the current low by moving higher within the trend, but smartly contains the trader’s exposure to the debit paid without opening up additional downside risk. All told, this simple combination aligns itself quite nicely with our outlook.
In reviewing GRUB stock’s options menu, one favored vertical of this kind is the Sept $135/$150 for $2.40 with shares changing hands at $125. For less than 2% of the risk associated with owning GRUB, this bull can realize a profit of $12.60 or 525% if shares are able to reaffirm the trend by achieving new highs through $150 by expiration.
In the interim, if GRUB moves higher sooner rather than later, this simple spread can be adjusted to cut down risk even further or altogether for that matter. That’s nice to consider. And if the low in shares doesn’t hold? Consider the less than 2% paid as a very small and welcome sales tax compared to the alternative of owning a volatile and sometimes less-friendly investment in GRUB stock
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.
