- SoFi Technologies (SOFI) stock is trying to bottom but much work remains.
- Overhead resistance looms large and it needs to break the 50-day moving average.
- Use naked puts to elevate your odds of success.
Sofi Technologies (NASDAQ:SOFI) shares have enjoyed a nice rebound off their lows in recent weeks. In fact, as of Wednesday’s highs, SOFI stock gained an impressive 37%. But, as significant as the recovery might seem, there are still a few reasons why the bear market may not be dead.
I’ll dig into the reasons below and explain why selling puts is a far superior option to buying shares right now.
| Ticker | Company | Current Price |
| SOFI | Sofi Technologies | $9.46 |
2 Reasons the Downtrend May Not Be Dead
From peak-to-trough, the descent from Sofi’s November 2021 peak has hacked 69% from its share value. But the losses didn’t come in a straight line. As with nearly all share price turbulence, a handful of dead-cat bounces arrived along the way to keep bears honest and provide lower-risk entries for new short-sellers looking to capitalize. The duration and magnitude of the previous rebounds varied, but even the most promising ones ultimately failed.
For example, the mid-February leap saw prices surge nearly 50% only to get smacked down at the declining 50-day moving average. Before that, we saw a 37% pop in mid-January that also failed at the 50-day. As compelling as both bounce attempts were, they proved powerless to turn the trend.
And that brings us to the first reason to doubt the bottom is in. SOFI stock has a history of sharp counter-trend rallies that failed miserably. This month’s rally wasn’t any more significant than its predecessors, so don’t let the stat that prices popped 37% be your only reason for buying.
The second reason bulls should exercise restraint is that the recent gains have done little in changing the downtrend’s structure. We’re still below the 50-day moving average. And, we’ve yet to cleanly break through and close above a prior pivot high.
To bring in new buyers, especially any chart watchers who heed technical analysis signals, SOFI stock needs to clear out overhead resistance. It’s an easier directional trade to buy after we’ve reversed the trend even if that means you’re purchasing at higher prices. My line in the sand is $11. That’s the level we need to be above before bull trades make sense.
If you can’t resist the temptation to bottom fish, then at least use options to enhance your odds of success. The covered call and naked put are both viable choices. I prefer the simplicity of the naked put.
The Appeal of Naked Puts in SOFI Stock
The naked put is also known as selling a put option. It’s a high probability strategy that allows you to get paid for your willingness to buy shares at a lower price. And, it creates a potential win-win scenario. If SOFI doesn’t fall too far in value, the put will expire worthless allowing you to pocket the premium you received upfront. If the stock does fall enough to push the put in the money at expiration, then you get to buy shares at a discount to their original price at trade entry.
Here’s the put month and strike to sell on SOFI stock: Sell the May $7.50 put for 34 cents per share ($34 per contract).
While $34 may not sound like much, the initial cost of the trade, if you’re in a margin account, is less than $100. That means the potential return on investment is north of 30%. And the market is pricing in an 82% chance of success. The worst-case scenario is Sofi sits below $7.50, requiring you to buy 100 shares at an effective purchase price of $7.16.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
