Sometimes it’s okay to let hot stocks rally without you. This has been a very strange year where this concept has been important. The pandemic lock-down lit a massive fire under internet names like Slack (NYSE:WORK) stock, Zoom (NASDAQ:ZM) and Peloton (NASDAQ:PTON). They rallied hard for extended periods of time, stoking lots of investor FOMO.
Buying Slack stock at the June highs and into earnings in hindsight was a clear mistake. But while it was happening, traders were blind to the risk.
That fear of missing out works in both directions, so it also opens the door for opportunity when those stocks fall. But first investors have to shed the instinctive fear of falling. Most tend to rush for cover by selling stocks or buying puts at the worst possible times. On the way up they bought it in droves, and on the way down they panic out of it. The June bulls have since amassed a lot of losses because Slack stock fell 40% from that high mark.
Slack Stock Fell Because of Wrong Expectations
The trigger for the last dip lower was a disappointing earnings report. Emphasis on the “disappointing” part because nothing has changed for the company’s economics except the expectations.
Investors got wrapped up in a theme and they took it to extremes. This created a dislocation between reality and hope. But therein lies the opportunity now. This phenomena also happens on the way down. Investors got spooked to the point they don’t want to buy the stock now when it makes more sense. They fear it’s headed lower. Sentiment causes investors to overshoot in both directions.
The September earnings crash for Slack stock was an opportunity to buy some. The brave souls that did so enjoyed a 36% rally. The door is still open for those who missed because of this pullback. The September rally was not a dead cat bounce, it was part of normal price action.
Those who believe in Fibonacci ratios, the price now is about at the 50% retracement of the last rally. This is a natural spot to rest and it’s part of normal price action. As long as markets in general are holding through this uncertain period of time, then Slack stock should be bottoming. Most often this is a process not a snapshot in time.
Next WORK Stock Trading Opportunities
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The next two biggest opportunities are below $24 for the bears and above $33 per share for the bulls. In between those two is the range that’s in play right now. It is rather wide but we can only interpret the charts, we don’t make them up. The good news is that price is near the pivot and this has been in contention for months.
The zone near $30 per share has been in contention since September 2019. It has served as catalysts for both bulls and bears. They both like it here so they will fight hard for it. The easy bearish money has been made and so by definition the long-term has more upside potential than downside risk. This thesis is for investors who have patience. Active traders need to be a little more surgical than this but that’s the topic for a different write up.
Options Could Help in Uncertain Times
Using options in this case makes a lot of sense. If I am optimistic about the future prospects but want a 20% buffer, I sell puts. An investor can sell the January $25 put and collect almost $2 for it today. If price holds or the stock rallies, then I earned money with no risk out of pocket. If Slack stock falls below $25 per share then I own it and I break even at $23.
It’s almost a no lose situation for as long as the original thesis is correct. Those who buy the shares outright now leave no room for error. Using options is daunting for investors who haven’t tried them. They are worth looking into especially in headline periods of time like this. Having a buffer zone between current price and money at risk means sleeping better at night.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.
