Shares of Roku (NASDAQ:ROKU) officially entered bear market territory yesterday, dropping over 20% from the recent highs at the $170 area. But the red-hot rally that took ROKU stock to such lofty levels was arguably way overdone. And in a similar fashion, the unrelenting selling in ROKU stock is getting a little overdone as well.
What all that means is that it’s time to position to be a buyer of Roku on any further weakness.
The competition in the fiercely competitive streaming space just got taken up a notch yesterday, leading to yet another plunge in the ROKU stock price. Comcast (NASDAQ:CMCSA) announced it will give a free streaming box to current subscribers, while Facebook (NASDAQ:FB) introduced Portal TV.
This follows on the heels of such heavyweights as Apple (NASDAQ:AAPL), Disney (NYSE:DIS) and Amazon making a move into internet media. While competing with the big boys can certainly crimp margins, ROKU does have the first mover advantage. Over 1/3 of all smart TVs now come with ROKU already installed.
Michael Morris of Guggenheim upped his price target yesterday from $119 to $180, citing under-appreciated international growth opportunities. He also noted that ROKU is in a rare win-win-win-win arrangement with hardware manufacturers, consumers, content providers and advertisers. Although the upgrade was ill-timed given the massive drop in ROKU stock, the long-term thesis still remains valid.
It’s important to also remember that ROKU had a huge earnings beat last quarter. The company reported an earnings loss of 8 cents, much better than expectations for a loss of 23 cents. Revenues were also presentable, coming in at $250 million versus the $225 million analyst consensus. ROKU also raised its full-year guidance. The recent carnage in ROKU stock, however, has all but wiped out the gains made post earnings.
ROKU Stock Charts
ROKU is looking decidedly oversold from a technical perspective. Its 5-day RSI is now below 20 and at levels that have signaled a significant low in the past. Its MACD just reached the lowest reading of the year. Downside momentum is getting extremely bearish, while Bollinger Percent B is nearing negative. Meanwhile, ROKU stock held the 50-day moving average, while the 100-day average of $108.58 should provide additional downside support.
ROKU saw some unusual option activity as well yesterday. Nearly 4,500 Sep 27 $140 calls traded versus only 261 open interest. This type of aggressive call buying likely means some big-time player is positioning for a pop in the ROKU stock price.
The huge drop in ROKU yesterday — nearly 14% — also drove up implied volatility. This means option prices are more expensive, favoring selling strategies when constructing trades. So to position to be a buyer of ROKU at even lower levels, an out-of-the-money bull put spread makes strategic sense.
Trade Idea for ROKU
Buy the ROKU Nov $95 put and sell the ROKU Nov $100 put for a $1 net credit.
The maximum gain on the trade is $100 per spread with maximum risk of $400 per spread. Return on risk is 25%. And the short $100 strike price provides a 23% downside cushion to the $123.98 closing price 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.