Just when I started to believe that I was missing out on the greatness of Roku (NASDAQ:ROKU), investors bailed on it in a big way. Friday was a devastating day for those long ROKU stock, as it fell 20% in one day. But what makes this more impressive is that it came on the heels of a 27% correction from the highs. Clearly, the risk appetite for the stock has waned dramatically.
So is it time to sell ROKU? The answer varies depending on the trader’s time frame and thesis. But one thing is clear, this is not a stock for the faint of heart. I personally have been a long-time critic of ROKU because it has been in business for 16 years, yet it still can’t turn a profit. I recently was reconsidering, so I was willing to entertain the hype. Now, the stock is a bloodbath.
Last week the old-school media dialed up the competition rhetoric from Viacom (NASDAQ:VIAB) and AT&T (NYSE:T) so stocks like ROKU, Disney (NYSE:DIS) and Netflix (NASDAQ:NFLX) suffered the consequences. Investors sold them in droves. This was inevitable but as usual, Wall Street binges on stocks until it throws them back up in disgust — and without warning.
The traditional fundamentals on ROKU are great — it’s growing user statistics fast. So as long as it can keep doing that, ROKU stock can still sustain its overvaluation. But last week was a reminder that momentum stocks like Roku, NFLX and Amazon (NASDAQ:AMZN) run fast but in both directions, so traders who invest in them should know what they are getting into.
Case in point: Even after the recent carnage, Roku stock is astonishingly still up 265% year-to-date. Clearly there is more froth to shed should investors continue hating on it. This would be especially true if the equity markets in general also correct this coming week.
ROKU Stock Is Down, But Not Out
In early August, even though it seemed unfathomable that it could rally any higher, I wrote about ROKU stock. I shared the possibility of more upside thanks to the $90 support zone. Indeed, the stock rallied 50% from there. It is back again, falling into the clutches of the century mark, so the opportunity presents once more for a similar setup.
This time it’s a little different though. The sellers are now in control so the onus is on the bulls to change that. Until that happens, I don’t chase upside potential, but I can still profit from the ROKU stock price. The 12-month point of control is below $70 per share. This is where the buyers and sellers have battled it out the most. There are also also two consolidation zones at $96 and $85 per share. Both are rubber bands, so definitely not hard lines, especially given the speed of descent.
So this falling knife is scary as it could turn out to be a machete that is missing its handle. Meaning, it could cost those who try to catch it digits. It is best to let Roku stock hit the ground before reaching for it. But just like before, instead of chasing frothy stocks, especially when they are still in my probationary bullish basket, I prefer selling downside risk to generate profits while leaving room for error.
A month ago, the trade was to sell ROKU Nov $75 put and it delivered an easy win. I can rewrite the same trade and this time collect $2.60 per contract to open. Or I can sell the Jan $65 put which gives me even more cushion and some extra time.
In either case, I would be catching the ROKU falling knife but leaving plenty of room for error. The stock can fall another 35% and I can still retain my maximum gains. Otherwise, I own ROKU shares and I accrue losses below those levels.
It is very important to note that I never sell naked puts unless I want to own ROKU stock. Otherwise I’d sell put spreads to limit the risk.
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. Join his live chat room for free here.
