• Roku (ROKU) isn’t Netflix (NFLX), but the streaming platform has challenges of its own.
• ROKU stock remains at risk of a larger selloff in its post-earnings reaction.
• A bearish earnings play using a short-term options strategy is attractive.

Source: JHVEPhoto/Shutterstock.com

Hamstrung consumers. Inflation. Rising rates. Russia. Covid-19. A backlash against growth stocks. There’s more than a few places to point fingers at Roku’s (NASDAQ:ROKU) continued fall from grace since ROKU stock peaked last July at nearly $500 a share.

This week, shares of Netflix (NASDAQ:NFLX) became another bad actor to join the line-up. The streaming video giant crashed 35% to four year lows on a surprise subscriber loss, it’s first in ten plus years and warned of even larger losses to come.

And in the wake of the report shares of ROKU have lost more than 14%. It would of course be difficult for investors to not connect the dots given Roku’s own similar and sizable piece of the streaming market, as well as the growth and saturated market concerns ushered in by NFLX’s earnings report.

Today though, and given Roku’s own quarterly results are due out next week, let’s take a look off and on the price chart and see if this week’s apples-to-apples reaction is worth biting into as a bullish or bearish investor.

Streaming Wars at Roku

They may seem similar, but Roku and Netflix are very different businesses. For one, Roku’s set-top streaming hardware isn’t vulnerable to the sort of password stealing problem Netflix faces. That’s good, right?

Another challenge now being addressed by NFLX that’s not an issue for Roku is the issue of advertising. Vis-à-vis Roku branded hardware, ROKU Channel, digital advertising and licensing, the company’s revenues lopsidedly favor the capture of ad dollars over the physical devices it sells for streaming.

Also and while Netflix has competing services from Disney (NYSE:DIS), Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL) Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and a host of other competitors to fend against, ROKU has been the glue that keeps them packaged neatly together.

It’s not all rainbows and puppy dogs though. Roku did miss on revenues this past quarter and reduced its Q1 sales guidance. As such, weak results could prove disastrous for ROKU.

Furthermore, MoffettNathanson noted in a reiterated “sell” rating, competition from internet-enabled TVs, a more leveraged Warner Bros. Discovery (NASDAQ:WBD) and the need to create more original content are potential headwinds in ROKU stock.

Lastly, there’s Roku’s bearish price chart and what’s proven an unforgiving operating environment for bullish investors.

ROKU Stock Remains At-Risk

Source: Charts by TradingView

It happens to the best of them, and ROKU stock has proven anything but an exception. It’s called a correction or a bear market if the price action turns more pressured. And that’s exactly the state of affairs in Roku with shares off a massive 80%.

But as large as the selloff has been, today’s Roku weekly chart is warning of unfinished business that’s positioned to get a good deal more ugly following earnings. Technically, shares of ROKU have just broken beneath a pattern bear flag centered on the stock’s 2018 to 2020 support line. It gets worse though.

With the consolidation also forming below a failed Covid-19-based 76% retracement level and stochastics crossing bearishly out of overbought territory, a stock reaction towards $55 to $60 looks possible.

Before readers think “no way,” a move of that size would be a NFLX-like or apples-to-apples stock plunge. Also, with shares trading in a technical air pocket between support zones, there’s nothing to prevent a test of lifetime support. There’s also nothing to prevent ROKU stock from staging a complete round turn from its Covid-19 life cycle.

Bottom Line on Roku Stock

There’s a famous scene in the film Platoon in which Sergeant O’Neill says, “I got a bad feeling on this one.” Similarly, the takeaway is the bears (and stunned bulls) have the ammo to take ROKU stock aggressively lower. And as NFLX proved, it is that kind of environment.

Earnings of course typically mean larger gap risk. And reactions, even with the best laid chartwork, don’t always work out as planned. Therefore, if investors are interested in a bearish trade in ROKU, I’d suggest a shorter-term, out-of-the-money put spread.

This type of combination can quickly maximize its full value, even if shares don’t produce a NFLX stock sequel. It also smartly cuts down risks associated with options Greeks. And in the event the bearish forecast totally fails, losses are contained regardless of how wildly wrong the position might be.

Alternatively, if you are more interested in purchasing shares, I’d simply advise a similar long call vertical spread in lieu of ROKU stock for the exact same reasons.

On the date of publication, Chris Tyler 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.