The S&P 500 erased its 2020 losses with yesterday’s rally, but not all stocks have participated. Luckin Coffee, Inc. (NASDAQ:LK) is one example, and since the recent bullish move isn’t the type that easily lets traders in, I want to target LK with a bearish position.
LK has been burdened with scandals since April, and that has hindered its recovery even as the rest of China tries to move on after COVID-19.
I think the uncertainty surrounding the company’s future will be enough to force investors out of the stock.
In Case You Missed It
In the middle of the pandemic, LK had a baffling scandal. In April, the company announced that an internal probe discovered that its COO had been fabricating sales in 2019. The COO and several of his direct reports falsified $310 million in sales, and the revelation sent the stock down by over 80% at the time.
In May, the company’s CEO resigned, and yesterday, the scandal expanded to engulf more of LK’s leadership. Authorities discovered emails from the chair of its board instructing LK employees to commit fraud.
The most recent financial information from the company is hopelessly outdated — it is from September of 2019 — and now investors know most of the information was based on incorrect data.
Even if the stock’s price is low, I don’t think anyone wants to get involved with a company with this big a gap in leadership.
LK After Trading Resumed
If you look at the chart below, you can see that LK’s price data skips from April to May. That’s because the Nasdaq delisted the company for most of April and May.
Daily Chart of Luckin Coffee, Inc. (LK) — Chart Source: TradingView
Now that trading has resumed, LK is starting to form down trending resistance. It bounced off the $7 level last Friday, and it could be moving to retest its lows around $1 to $2.
Traders can set themselves up for a quick profit with a debit spread. I don’t want to bet on a full collapse of LK, so I’ve set the upper strike price at $5, which should allow traders to collect in the short term.
Using a spread order, buy to open the LK July 2nd $5 put and sell to open the LK July 2nd $3 put for a net debit of about $1.10.
About Put Debit Spreads
A debit spread is simply a way to lower the cost of buying options, as the option that you sell to open (short) helps offset the cost of the option that you buy to open. Therefore, this put debit spread is a way to lower the cost of buying bearish put options. Many brokers will require the use of margin and/or a set amount of reserved capital to execute a debit spread; contact your broker directly for specific requirements.
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