A “gorilla” scare in top banana Roku (NASDAQ:ROKU) is offering momentum and growth traders a decent entry point in ROKU stock. However, gaining long exposure where supportive price volatility could always take a turn for the worse is made more approachable with a smartly placed, modified fence options strategy.
Let me explain.
The 800 lb. gorilla known as Amazon (NASDAQ:AMZN) did a little number on ROKU stock Wednesday. The market’s largest over-the-top or OTT streaming TV provider and one of investors’ current momentum darlings took a ding of nearly 5% following a report that the tech behemoth’s Internet Movie Database subsidiary may launch a competing service.
Tentatively called FreeDive, Amazon’s offering would be an advertising-supported video service for its Fire TV streaming devices. It would also be separate from its highly successful Prime Video business according to news website The Information, which first reported the story.
It’s a headline negative for ROKU stock given Amazon’s muscle and seemingly unstoppable ability to crush the competition in any business arena it sets its sights on.
Then again, competitive threats from other tech giants like Apple (NASDAQ:AAPL), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) or Facebook (NASDAQ:
FB) are nothing new for Roku. And one by one, in the face of bearish fear mongering that Roku can’t possibly continue compete, it does so both off and on the price chart.
Roku Stock Daily Price Chart
I last wrote about ROKU stock in early June during the early stages of an uptrend. The bullish change of character followed a volatile, but technically pleasing corrective move for reversal traders familiar with the Fibonacci-based Gartley pattern.
It was easy to be bullish in my view. And ROKU hasn’t disappointed. Shares are up 60% in just under three months.
Technically, the eye-candy performance has been made possible with a return of more favorable price volatility. The price action has made any pullbacks short-lived and solidified ROKU stock’s uptrend. It even established a very well-formed corrective cup-shaped base, which recently broke out from a smaller handle consolidation.
Now, on the heels of Wednesday’s Amazon-induced pressure on shares, ROKU stock has been sent into a testing position of prior pattern resistance. The opportunity is here for bullish traders that are looking to buy the name on a pullback and into support in anticipation of continued upside momentum.
ROKU Stock Modified Fence Strategy
While ROKU stock’s 60% jump has undoubtedly been a great position, my previously suggested Aug $41 / $47 call vertical managed to capture a dazzling 275% or $4.40 in profit during the same rally in shares.
Now, with our eye on continued upside for ROKU and shares also solidifying their bullish character, I like the idea of positioning with a modified fence strategy. With ROKU changing hands just below $60, selling the Oct $60 / $55 put spread and purchasing the Oct $65 call for a debit of 35 cents is favored.
If ROKU reasserts its bullish momentum in the coming days, the scant entry price will result in a significant gain if shares even flirt with the recent high of $64.48. And if the trend really builds, once the October call is in-the-money, there’s no telling how valuable this position will become.
Don’t think for a second this is a free lunch though. The initial cost may be minuscule, but there is $5.35 of exposure or the equivalent of roughly 9% ROKU stock risk below $55-per-share. Still, for those Roku bulls motivated to buy this momentum name as it trades into technical support on the likelihood the price weakness will be temporary — and do so with limited risk — ROKU stock is looking all the more attractive.
Disclosure: 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.
