Vinco Ventures (NASDAQ:BBIG) has fallen sharply after the latest failed squeeze attempt.
BBIG stock traded all the way up to new all-time highs of $12.49 on Sept. 8 before sanity prevailed and the pullback began. Meme-driven stocks such as BBIG are prone to ridiculous run-ups at any time.
Once the momentum breaks, though, ultimately these stocks succumb to the selling. Look for BBIG stock to continue to flounder in the next several weeks.
InvestorPlace contributor Mark R. Hake, CFA just penned an insightful analysis on BBIG stock. The ultimate conclusion, even after taking a deep dive into the capitalization, was clouded at best. The warrant issuance is the main culprit in the obfuscation. Trying to guage the cash on hand is an impossible task.
Vinco Ventures had better have plenty of cash on hand given the cash burn rate. The latest earnings report showed a loss of over $5.00 per share compared to a loss of just 18 cents in Q2 of 2020.
While much of the loss in Q2 2021 can be attributed to the warrant issuance, the company still showed a loss of 23 cents ex-warrants on revenue of only $2.69 million.
It’s important to remember that BBIG had never shown a profitable quarter since inception. BBIG stock now has a market cap of over $550 million for a company with less than $15 million in annual revenues. A P/S multiple of 35x is hard to stomach even in this meme-driven investment world.
Technical Take on BBIG Stock
The technicals don’t look rosy for Vinco Ventures. Shares reached historically overbought levels before quickly collapsing. the nine-day RSI breached the stratospheric 90 area before dropping. MACD and momentum both got to the most extreme readings ever before falling quickly. BBIG stock traded at a massive premium to the 20 day moving average.
The last time these technical indicators aligned in a similar fashion was late January, as seen in the chart. This marked a significant top in BBIG.
Expect a similar scenario to unfold now as the short squeeze mania subsides. Look for Vinco Ventures to have trouble heading higher over the coming weeks. A retest of the support area at $6 appears the most likely scenario.
Shorting BBIG stock outright is risky and expensive. Shares are hard to borrow due to the big short interest. Brokerage firms are thus able to charge for the ability to lend out the shares for shorting.
Any trader who wants to short the stock ends up paying this fee. The last short borrow fee I saw was nearly 70%.
Luckily the options market provides a simple, risk-defined solution to taking a bearish short-term stance on BBIG stock.
Implied volatility (IV) is at extreme levels meaning option prices are very expensive. This favors incorporating some form of option selling into the overall trade structure.
So to position for a pullback in BBIG stock a put calendar spread makes intuitive sense.
How to Trade It
Buy the BBIG Oct. 15 $6 puts and sell BBIG. Oct 1 $6 puts for a 35 cents net debit
The maximum risk on the trade is just $35 per spread. Ideally, BBIG closes near $6 at the Oct. 1 expiration to realize the maximum gain. The trade structure allows the selling of the Oct. 8 expiration options to further reduce the overall cost of the trade.
The put calendar captures nearly 20 points of term structure of volatility edge. The long Oct. 15 $6 put carries a 237 IV while the short Oct. 1 $6 put trades at a higher IV of 257.
On the date of publication, Tim Biggam 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.
Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, 4 years as Lead Options Strategist at ThinkorSwim and 3 years as a Market Maker for First Options in Chicago. Tim makes weekly appearance on TD Ameritrade Morning Trade Live, CBOE TV Vol 411, Business First AM Trader Talk and bi-monthly appearances on Bloomberg TV Options Insight to discuss options and volatility. Tim has also been invited for reoccurring appearances on CNBC’s Volatility Playbook.