Don’t Bother With Lemonade Stock, Even if Life Gives You Lemons

Lemonade (NYSE:LMND) stock has been plagued by disappointment ever since its post-IPO burst. What began as a red-hot rally rapidly morphed into a downtrend that continues to this day. Along the way, we saw an earnings report that did nothing to rescue LMND stock from its downward spiral.

It's a Compelling Company, but Now Isn't the Time to Buy Lemonade Stock
Source: Piotr Swat /

Both the absolute and relative weakness give little hope to bulls looking for a reason to buy. Below, we’ll chronicle the rollover and suggest how you can position yourself to profit from its continued declines.

Lemonade Stock Chart Gives Little Hope

Buying freshly minted IPO stocks is a high-risk endeavor. The absence of any price action coupled with scant fundamental data means investors piling in the days following the debut are doing so mainly on hope. Fortunately, LMND stock has now traded for two months. As such, we now have a trend in place, including multiple support and resistance zones and a few moving averages to boot.

The minimal amount of data means there’s no need to fiddle with the weekly time frame. All we need to know is laid out clearly in the daily view. A downtrend has been in place almost from the get-go. The initial IPO euphoria lasted two days and, incredibly, almost doubled the share price from $50 to $96.51. But the optimism was ephemeral. In the weeks since, prices have returned to where they started.

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Source: The thinkorswim® platform from TD Ameritrade
Source: The thinkorswim® platform from TD Ameritrade

The descending 20-day moving average echoes the short-term downtrend. We just had the 50-day crop up, and it too sits above prices, confirming Lemonade stock remains bearish.

Old Floor, New Ceiling

Last week saw a classic three-day retracement form. It carried LMND back to an old support zone near $56 as well as the falling 20-day. Given the trend’s trajectory, it should come as no surprise that the old floor became a new ceiling.

Friday’s down day and today’s follow-through is signaling the next down leg has begun. One indicator suggesting that the rally was destined for failure was the volume. Participation was low and suggestive of only mild buying interest.

Earnings certainly haven’t helped matters either. The sole report we’ve seen out of the company saw a loss of $1.77, far exceeding expectations of losing $1.29.

In sum, the combination of poor fundamentals and a deteriorating trend provides zero reasons for bottom fishing here. At a minimum, I suggest waiting for signs that the trend is reversing. That includes a break of resistance or pushing back above the 20-day and 50-day moving averages.

Can’t Short, Use Put Spreads Instead

If I’ve adequately sparked your desire to short shares of LMND, prepare to be disappointed. You’ll likely find it hard to borrow. As such, you’re relegated to the options market for placing bearish bets. Fortunately, the liquidity isn’t terrible, though I would still advocate using limit orders to ensure a decent fill.

Because it’s still in its infancy, LMND stock options carry higher implied volatility. Currently, it’s at 88%. That suggests premiums are pricey, and building a spread trade is superior to buying options outright. There’s no need for an overly complex position. A simple put vertical spread will do.

The Trade: Buy the Oct $45/$40 put spread for around $1.75.

Consider it a wager that Lemonade stock falls to $40 by the Oct expiration. If it does, you’ll capture the max profit of $3.25. The initial cost of $1.75 represents the max loss and will be forfeited if LMND sits above $45 at expiration.

If you want a more conservative trade, you could use December options to provide more time for the stock to make its move.

On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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