Cathe Wood’s Arkk Innovation ETF (NYSE:ARKK) is having a rough go this holiday season. The selling intensified over the past week with an explosion in trading volume. While a tradable bottom could be imminent, there’s no denying the trend is down and rallies are suspect. Bruised and battered price charts litter the landscape but today we’re going to highlight three ARKK stocks that find themselves deep in bear country.
Optimists will rightly point out that many of ARKK’s constituents are extremely oversold and due for some mean reversion.
But catching falling knives is a rough way to try to make some dough in the market. Sentiment has soured for the high-growth names that call ARKK home, and the fallout has been breathtaking.
With prices down another 6% in midday trading Friday, ARKK has now fallen 26% over the past month alone. Here are three holdings that are top picks for bear trades:
Let’s take a closer look at each.
ARKK Stocks: DocuSign (DOCU)
Every quarter we seem to get a new poster child that reminds investors of the severe risks surrounding earnings reports, particularly among high multiple stocks. For Q4, I’m nominating DocuSign as the best example to use. Shares are down 41% in a single session, wiping out the past eighteen months of gains.
No need to look hard for the culprit. Last night the company posted earnings that showed lower growth forecasts than expected.
If you think cutting the stock nearly in half is an overreaction, then step up and buy. As for me, I’ve seen too many ARKK stocks get whacked and continue falling after releasing disappointing numbers this quarter.
DOCU stock should follow in their footsteps.
The Trade: Buy the January $135/$115 put spread for $7.30.
You’re risking $7.30 to make $12.70 if prices can fall to $115 over the next 49 days.
Believe it or not, Teladoc was trading over $300 in February. Now it’s below $100. From peak-to-trough the once loved stock has plunged 70%.
As you’d expect, prices are submerged beneath every major moving average. The downturn accelerated in recent weeks just as the ARKK ETF started its latest down-leg.
Because prices are extended to the downside, and a snapback could be sharp, I like using limited risk put spreads to press the bearish bet here. The risk/reward for the trade is better than lobbing out-of-the-money call spreads.
The Trade: Buy the January $90/$85 put spread for $2.15.
You’re risking $2.15 to make $2.85 if TDOC stock slips to $85 by expiration.
ARKK Stocks: Roku (ROKU)
Since the correlation is so high among many of the ARKK stocks, being on the right side of the trend has been far more important than picking the right stock. The recent market maelstrom has taken nearly every holding out at the knees, creating many deserving candidates for today’s message, but I went with Roku for the final idea.
In late July the company was on top of the world with a record share price just shy of $500. If only that were the end of the story. Unfortunately, over the next four months, the stock cratered 58%.
Prices are definitely oversold, but that’s been the case for most of the past month and yet we continue sinking.
If you think the trend continues, then bear puts offer large profit potential.
The Trade: Buy the January $200/$190 put spread for $4.20.
You’re risking $4.20 to make $5.80 if ROKU sits below $190 at expiration.
On the date of publication, Tyler Craig 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.
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