Where there’s risk, there is the possibility of even larger rewards. And nowhere is that more evident than in shares of Luckin Coffee (NASDAQ:LK), which recently spilled the beans and burned investors big-time. But going forward, is LK stock a better buy, short or best avoided altogether? Let’s take a closer look at what has happened to the stock today.
Have you ever dreamed of owning the next Apple (NASDAQ:AAPL) or more fittingly, the next Starbucks (NASDAQ:SBUX)? If you said yes, you’re not alone. And China’s Luckin Coffee certainly appeared to fit the bill. But as it turns out, the bill being handed to investors was a counterfeit.
In early April, Luckin shares quickly went from being a growth story, promising heir apparent and challenger to Starbucks’ coffee empire to a company with dirty financial laundry. LK stock plunged over 75% in a single session on news of accounting shenanigans. Two days later, trading of the stock was halted by U.S. securities regulators.
Luckin cleaned house of its CEO and COO and shares eventually re-opened for business on May 20. But investors weren’t done heading for the exits.
Shares promptly sank another 36% to below $3. And two sessions later, Luckin was off another 60%. De-listing fears, worries of even larger failures from its existing operations and intensifying geopolitical saber rattling with China were widely seen as easy marks behind the selling pressure. And when all was said and done, Luckin shares finished at $1.39 or the cost of a medium cup of Joe at the local convenience store.
Then things cooled off for the company and LK stock, maybe less-than-mysteriously, began to climb higher. By last Thursday, shares traded on record volume as high as $4.81. Luckin then followed through another 36% to finish at $5.51 to close out the week.
So, what gives? Could it be that in the face of Luckin’s financial lies some investors still see enough cash value and investments on the books that makes them willing to take a shot at it rather than a short? Or, speaking of which, could some of the stock’s 15% short interest have helped with the buying? It’s probably a little bit of both, which incidentally adds up quickly in an already notoriously active stock like Luckin.
Still, what about making a play in Luckin today taking the opportunity to profit from shares going forward?
LK Stock Weekly Price Chart
Source: Charts by TradingView
Some will warn Luckin isn’t to be trusted. And given the latest news the company’s chairman and largest shareholder is now also facing criminal charges, I certainly wouldn’t trust the stock. But I don’t mind putting a bit of trust into the price chart in conjunction with a limited and reduced risk options play.
Right now, and following Friday’s intraday high of $6.79, LK stock has constructively declined by around 40% in a three-day pullback pattern. While it’s obviously not for the faint of heart and Luckin has already burned shareholders once, buying a “slightly” out-of-the-money, shorter-term bull call spread looks interesting. This is even more true when you consider it as a smaller and speculative side bet if shares can confirm a pivot pattern low this week.
If a buy signal occurs either Thursday or Friday, the July $5 / $7 call spread is a favored spread to purchase.
A current price of 33 cents for the vertical in Wednesday’s session as Luckin changes hands at $4.15 will cost traders another nickel, or perhaps, a dime more for the price of having some technical confirmation. Still, in the scheme of what’s happening off and on the price chart, both are sensible strategies and offer more than enough leeway to appease anyone’s appetite to gamble.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any of the 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.