Shares of Roku (NASDAQ:ROKU) have been on a monster run following the latest earnings report last Wednesday. ROKU stock hit an all-time high Friday as investors continue to cheer the perceived unbridled growth prospects for the streaming device maker.
While the earnings news was better than expected, the reaction in the stock has gone too far, too fast. Look for red hot rally in ROKU to stall out over the coming weeks
ROKU reported earnings on Aug. 8, with earnings coming in at break-even on revenues of $156.8 million. That puts the price to sales ratio at a still nosebleed 9.7 times revenues. With no earnings yet, the traditional P/E metrics don’t apply. Guidance was raised slightly from a range of $164 to $172 million to $166.2 million. Yet ROKU stock soared nearly 25% on the news. ROKU stock is priced for perfection.
Click to Enlarge Of course, stocks like ROKU trade on fundamentals, but rather on faith and technicals. That said, ROKU stock is getting extremely overbought from a technical perspective. The 9-day RSI is now approaching its highest readings over the past year at 80.76. Previous instances when ROKU was this overbought proved to be significant short term tops in the stock.
The price action from Friday, with ROKU trading up to all time highs at $60.65 before reversing sharply to close $2.60 lower, signals a major reversal pattern in the stock. These types of reversals are many times emblematic of a short term top in the stock, especially following such a big rally. The buyers are likely exhausted.
Implied volatility (IV) in ROKU is nearing historically low levels following the usual post earnings vol crush. This means option prices are comparatively cheap, favoring long option strategies. So to position for a pullback in ROKU stock, and a break of the $57.50 level, a put diagonal spread makes sense.
ROKU Stock Trade Idea
Buy ROKU Oct $55 puts and sell ROKU Sep $50 puts for a $2.30 net debit.
Maximum risk on the trade is $230 per spread. Ideally ROKU closes near the $50 strike price at September expiration to realize the maximum potential gain. The spread is 18 deltas net short at inception, or the equivalent of being short 18 shares of ROKU stock.
Tim may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his option-based strategies can go to https://marketfy.com/item/options-and-volatility.
