Jumia Technologies (NYSE:JMIA) rocketed yesterday on the news of a partnership with shipping giant United Parcel Services (NYSE:UPS). The African e-commerce company will now use UPS to improve delivery efficiency, especially in the critical “Last Mile.” JMIA stock leapt almost 25% on the news to close at the highest levels of the year.
The question is whether to jump in now or wait for lower prices. The price action says to wait for a cheaper level. Selling puts allows you to get paid now for waiting to be a buyer at lower levels.
JMIA stock did have a big day yesterday, closing up $2.34 to $11.82. Shares, however, closed well off their intra-day high of $12.53. Jumia opened up higher this morning only to immediately succumb to selling pressure. This type of two-day price action is usually a sign of fatigue. The buyers have become exhausted and the sellers have taken control. Lower buy points may be in the offing.
Options trading exploded on the news yesterday as well. This was especially true in the short-term April 8 expiration calls. For example, the April 8 $11 calls saw more than 7,000 contracts trade versus just 524 open interest. The April 8 $13 calls traded 4,500 contracts versus just 19 open interest. It’s unusual volume, to say the least.
This spike in options trading is a telltale sign of speculative excess. It is a reliable contrarian bearish indicator, at least in the short-term. The massive call buying drove implied volatility (IV) up sharply from under 80 to over 100, making option prices much more expensive.
This makes selling puts to buy at lower levels even more appealing. As of this morning, the May 6 $10 puts are priced around 90 cents. You can collect $90 per contract by selling these puts. It also means you are a willing buyer at $9.10. ($10 strike less 90-cent premium received.) For reference, JMIA stock closed at $9.48 before the UPS deal was announced.
Investors looking to add Jumia stock to their portfolio should wait for a further pullback before buying. Using a put selling strategy is a viable way to take advantage of rich option premiums and get paid for your patience.
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.