While some investors are likely expecting a bullish technical situation to unfold, it’s our contention Spotify Technology (NYSE:SPOT) is a dog about to roll over on the Spotify stock chart. And for like-minded traders wanting to profit from lower prices, a modified bearish put butterfly spread looks good just in case SPOT decides to bite back. Let me explain.
This recent initial public offering (IPO), and the world’s largest streaming music platform, is surely a favorite with many growth traders. Spotify stock has a lot going for it, which could result in shares running higher from here. But this strategist isn’t convinced.
Don’t get me wrong … I can fully appreciate Spotify’s enviable position atop tech giants Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN) and Alphabet Inc (NASDAQ:GOOGL). The company’s recent partnership with Samsung also seems like a long-term winner, and Spotify’s ability to attract ears and eyeballs with its free music platform as a gateway to more paying subscribers does appear to be a very smart business move.
Technically, SPOT stock also has a lot of factors favoring higher prices. This week shares confirmed an undercut pivot low, which sets up a high-level double-bottom, or “W” base.
With the pattern having also corrected a healthy 14% and found support off of the 38% retracement level, the bullish consolidation is a solid platform for higher prices in Spotify shares:
Now for the bad news: Corrections like in Spotify stock aren’t always so neat when all is said and done. The reality is every bullish price pattern has a darker side to it, including the one in SPOT stock.
The same chart shown below, sans our sanguine observations, also reveals a broken uptrend and return move or bear flag that’s failed at resistance with Thursday’s reversal candlestick.
Additionally and as our second scenario also shows, stochastics has been and still looks more supportive for a bearish entry into SPOT stock. Net, net I’m inclined to see SPOT run, but I’m anticipating a downhill affair with shares rolling over from here.
SPOT Stock Bearish Combination
In anticipating a larger, but still healthy and fairly common corrective move of up to 30%, or slightly more than double the current pattern decline in share price, an intermediate-term modified put butterfly spread is favored.
With SPOT stock at $180.89, one combination that has our attention is the January $165/$145/$135 put butterfly for $3.15.
This spread limits the trader’s exposure to a more bullish pattern such as the described double-bottom successfully playing out to 1.70% of shorting Spotify shares. Bottom line, if shares don’t proceed lower this put combination will eventually expire worthless, but only the initial debit is at risk.
Bottom Line on Spotify Stock
If SPOT stock does begin to make good on its bearish setup, a move beneath the bear flag of around 4% will put this spread in-the-money. The sweet spot for profits would be an additional drop of $20 in shares to $145. At expiration, a corrective move of 28% into the sold middle strike price would translate into profits of $16.85, or a return of 535%.
Lastly, if a healthy correction turns a bit more dramatic and shares of Spotify find themselves revisiting SPOT’s all-time low of $135.51, a picture perfect or blemished double-bottom will still find this trader enjoying profits of at least $6.85 due to the modified design of this butterfly. Now that’s music to my ears and certainly nice on the eyeballs as well.
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.