It’s as if the pandemic crisis last year wiped all investor rhyme and reason. Suddenly there’s no in-between and everything is extreme. The days of doing homework and investing in an idea are on hiatus. Take Roblox (NYSE:RBLX), for example. RBLX stock cannot sit still for more than a few days at a time. It is constantly rallying leaps and bounds, and in both directions.
In early May it fell into an abyss threatening to set a new all-time low. Then it bounced into a 62% rally without much warning. The reaction to earnings may have triggered it, but they overshot on the upside as well. I know this because since the earlier high this month, it has given back 24% and straight down.
This is where knowing how to read charts helps a lot. Fundamentals are still important, but in the face of such whipsaw action we need something extra. Capitulating out of RBLX stock as it fell into this week’s low is counterproductive. That was the breakout level from late May. Often enough when stocks revisit a pivot zone they find support on the way down. There should be buyers lurking below here.
The company fundamentals are solid, as I covered in an April article. It hasn’t been public for long, but it has shown that it can grow its P&L. This is not a cheap stock because it still has a 40x price-to-sales ratio. It won’t take much to disappoint those who buy shares now.
They’ve already given it credit for effectively 40 years worth of its sales. Investors demand perfection when they are paying up this much for the equity. On the other hand, a high price-to-sales ratio is not a reason to shy away from the stock. It’s just a cautionary signal to temper the enthusiasm.
Catch the RBLX Stock Knife With Confidence
Roblox stock is currently a falling machete, but one that I would dare to catch. My method for doing so would be in the options markets, where I can build an appropriately large buffer. I am confident that there will be buyers as it approaches $70 per share. Nevertheless, the indexes are still near all-time highs, so I need more assurances.
Options allow me to leave room for error. For example, investors who sell RBLX October $65 puts can collect more than $4 a piece for them. This is a net credit trade so it doesn’t even need a rally to win. In fact, the stock can fall another 27% and they could still break even.
Given what the Fed said last week, equities should find difficulties rallying into the second half of 2021. The more leeway I can place between current prices and my risk the better.
Resistance to Rally
I usually gain conviction by doing homework. But these days, especially in newer stocks like this, that logic doesn’t always work out. I would avoid buying call options in this environment. First of all, the CBOE Volatility Index (VIX) is still high so all premiums are expensive. Moreover, rallies in RBLX stock are likely to face resistance going into $90 per share.
My preference would be to either take a small position with shares or sell puts in the mean time. This would reduce the sensitivity to time element. This opportunity should be a mere rinse-and-repeat scenario from April. Yet I would still employ proper stop losses just in case. Back then I mentioned that the earnings report could be a catalyst and it was. The stock rallied for 23 days to post a new high.
I can’t promise the same results now but the setup is similar. It will still need the market in general to continue its own ascent.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.