- Roblox (RBLX) stock is finally flashing signs of a bottom.
- While more evidence is needed before declaring victory, bulls have their best chance at a reversal in months.
- Here are two trade ideas for how to capitalize.
For months the deep discount in Roblox (NYSE:RBLX) has beckoned to bottom fishers. But so far, trying to nail the low has resulted in bruised egos and battered accounts.
The selling has been relentless, and there have been too many failed bounces to count. RBLX stock has cratered 85% from peak to trough in the largest fallout in growth stocks since the dot-com crash.
That said, I find its behavior following the recent earnings announcement constructive. In fact, I’m more interested dipping my toe in the water than at any time this year.
RBLX Stock Rallied on Poor Earnings
This earnings season has seen pain and destruction visit a broad swath of companies. Even minor misses have been mercilessly punished. This week’s crashes in Walmart (NYSE:WMT) and Target (NYSE:TGT) are simply the latest examples.
Closer to Roblox’s wheelhouse, we’ve seen growth stocks like Netflix (NASDAQ:NFLX) and Teladoc (NYSE:TDOC) get taken to the cleaners. Consider the response to Roblox’s underwhelming numbers with that backdrop in mind. The stock actually went up after reporting wider-than-expected losses and revenue that fell short of estimates!
When prices stop responding to terrible news, it means sellers are exhausted, and the stock has already priced in the worst. With RBLX having already destroyed a legion of investors by declining 85%, anyone who follows the company is certainly hoping the end is near.
Support From Accumulation and Relative Strength
But it’s not just the lack of selling after earnings. It’s also the upside follow-through on substantial volume that we’ve seen. High volume up days signal that institutions are accumulating shares. It’s a positive omen that’s largely been lacking in Roblox until now.
Watch for a break over $36, which is the previous pivot high. Beyond that, breaching the 50-day moving average would add secondary confirmation of a turnaround in the daily downtrend.
I have one more reason for optimism. Growth stocks as a whole exhibited relative strength this week. It’s as if with Walmart, Target and the rest of the retail industry getting destroyed, the bears found a new toy to play with, and they’re finally leaving the growth factor alone. Maybe it’s wishful thinking, and this is the lull before another storm, but I find this week’s outperformance from the likes of RBLX to be a nice change of pace.
Two Smart RBLX Stock Trades
If you want to use options to enhance your probability of profit or juice up the potential returns, then here are my two favorite ways to play.
Implied volatility is still rich enough to make selling puts attractive.
Trade One: Sell the June $22.50 naked put for 56 cents.
Consider this a bet that RBLX stock stays above $22.50 for the next month. If it doesn’t, you’re obligated to buy shares for $21.94, which may not be a bad entry price anyway.
Try a bull call spread if the 56-cent per share pay day isn’t aggressive enough. This one offers the potential to capture a 200%+ return.
Trade Two: Buy the July $35/$45 bull call spread for $3.15.
You’re risking $3.15 to make $6.85 if the stock reaches $45.
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.