- SNAP stock finally finding some love after a sharp sell-off
- The technicals point to the worst being over
- Selling puts to position to buy on a pullback
Shares of camera company and social media stalwart Snap (NYSE:SNAP) have had a rough go of it over the past few months. SNAP stock has been cut down by nearly 53% since making all-time highs around $80 last September. The latest earnings beat may finally have put a floor in for the stock. Time to be a buyer on any further weakness.
Snap reported earnings on Feb. 3. The company handily beat on both the top and bottom line. Daily Active Users (DAU) and Average Revenue per User (ARPU) also exceeded expectations. The combination of a beaten-down stock and an upside surprise makes valuations more compelling.
The analysts certainly think that SNAP stock is looking attractive at current levels. TipRanks shows the consensus rating as a moderate buy. The average price target of the 30 analysts covering the stock is $53.64. This equates to over 40% upside from the latest closing price of $37.87. The lowest forecast was $36.
Muslim Farooque recently wrote an article on InvestorPlace talking about how SNAP stock was trading at a discount. InvestorPlace contributor Josh Enomoto followed up with a piece also referring to the SNAP stock discount, albeit in a slightly less bullish tone.
Interesting that both used the term “discount” when talking about the big drop in SNAP stock over the past months. As an options guy, I use the term discount when discussing selling out-of-the-money puts to acquire stock at a price below current levels. The combination of selling puts on an already discounted stock price may indeed be a double discount. Time to do a discount double-check.
| SNAP | Snap Inc. | $37.38 |
Technical Take on SNAP Stock
I have been doing techncial analysis for over 30 years. I truly can’t remember in all that time such a confluence of bullish bottoming formations as evidenced now in SNAP stock.
Shares of SNAP bounced off the major support area at $28 on two recent occasions. The price pattern is the poster child of a double bottom reversal formation. SNAP confirmed the bottom by breaking back above the key $35 level. It has now filled in the gap going back to the earnings breakout back in October 2020.
There was also a bullish island reversal formation preceding earnings on Feb. 3. SNAP stock gapped lower to trade under $25. The following day shares gapped up big-time to nearly $39 on the back of better-than-expected earnings. Though rare, this island formation is almost inevitably a sign of a capitulation low. The sellers are washed out and the buyers are back in control.
Click to Enlarge
All of these technical indicators lend further credence to $28 being a major low for the foreseeable future. It is even more powerful given the magnitude of the previous punishing sell-off. There is major overhead resistance at the $50 area.
Chasing SNAP stock higher is not a recommended play in this market environment. Since the Fed meeting March 15, stocks generally have been rallying hard — perhaps a little too hard. SNAP is now up 24% from those mid-March lows.
One can certainly wait for a pullback to add some SNAP to the portfolio. Better yet, selling some out-of-the-money puts allows you to get paid now to be a buyer of SNAP later and at lower levels.
How to Trade It Now
Sell SNAP June $28 puts and buy the June $23 puts for a 70 cents net credit
Maximum gain on the trade is $70 per spread. Maximum risk is $430 per spread. Potential return on risk is 16.27%.
The short $28 strike price provides a 26% downside cushion to the $37.87 closing price of SNAP. It is also structured right at the major support level of $28.
Traders looking to have a more neutral outlook may elect to sell an upside call spread to create an iron condor trade. Selling the June $50/$55 call spread would bring in additional credit of 55 cents to help increase potential return to 33%. The strike differential on the short call spread is the same as the short put spread (5 points). Hence there would be only margin required on one side of the trade overall.
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.
