Shares of Beyond Meat (NASDAQ:BYND) have had a red hot six day rally. Beyond Meat shares have added on over 40 points, and nearly 56%, since just Jan. 6. Some of the run up was warranted given some bullish news, but the majority of the rally in Beyond Meat stock was likely stoked by a massive short squeeze. Now that the shorts have been forced to cover, the stock will likely head lower over the coming weeks.
News on Jan. 7 that competitor Impossible Burger would be unable to provide McDonald’s (NYSE:MCD) with enough product was the initial catalyst for the spike higher. This created a massive short covering rally, given that over 40% of the float was shorted.
Days to cover — a volume based measure of the magnitude of the shares of Beyond Meat stock shorted — reached a record of three coming into 2020. Ihor Dusaniwsky of S3 Partners tweeted out yesterday just how much damage had been done to the shorts over the past few weeks.
Beyond Meat stock is certainly getting extremely overbought from a technical take. Its 14-day RSI is now at the most extreme level ever as it nears 90. The last time it approached such lofty levels proved to be a significant intermediate-term top in Beyond Meat stock. Bollinger Percent B echoes that overexuberance with a reading well above 100. The MACD also just printed at the highest it has ever been. There is major overhead resistance at $140.
Most importantly, the company had a major intra-day reversal yesterday. Shares opened higher, then immediately ran to fresh recent highs near the $135 area. Beyond Meat stock then quickly reversed course to close almost 18 points off the highs of the day at $117.05. This type of price action is many times a sign that the buyers may finally be exhausted. It is even more powerful after such a strong rally and near such a major resistance area. Many of the shorts likely were forced to capitulate after being squeezed hard.
Beyong Meat stock is difficult, if not impossible, to borrow to short. It is also expensive with a 2.29% borrow fee. It is also very risky given the extreme volatility in the stock.
How to Approach Beyond Meat Stock Today
The difficulty in borrowing the shares means normal put-call parity for option pricing no longer applies, making buying puts to position bearishly very expensive. Instead, a bear call spread can be used to take a shorter-term negative view on Beyond Meat stock in a defined risk manner.
Selling the Feb $140/$145 call spread should net about 75 cents of option premium, or $75 per spread. Maximum risk on the trade is $425 per spread. Return on risk is 17.64%. The short $140 strike price provides a 19.65% upside cushion to the $117.03 closing price of Beyond Meat. It is also structured right at the major resistance level.
Ideally, the stock remains well behaved and the bearish call spread expires worthless for the full profit potential. A meaningful move above the $140 resistance level would be a viable stop-out point to avoid taking the maximum potential loss.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at timbiggam@gmail.com.
