Social media platform Rumble (NASDAQ:RUM) is back in the spotlight. Recently, RUM stock popped sharply higher following a report that the company is ready to serve as a cloud technology partner to TikTok, the short-form video app that’s wildly popular with young people.
Last week, a top Republican lawmaker stated that he would help lead a House of Representatives vote on a bill aimed to force ByteDance — TikTok’s parent company — to sell the app. Theoretically, partnering with TikTok would greatly expand Rumble’s influence. In comparison, Rumble has a much narrower user base.
Despite this exciting potential catalyst for Rumble, RUM stock is a bearish bet. Traders should take advantage of this dynamic to reap “downside” profits.
Why You Should Bet on the Downside in Rumble
When we trade on a short-term basis, we’re not really interested in broader fundamentals. Though they may be interesting for investors, we’re primarily focused on data and momentum. Regarding RUM stock, it’s printing a certain rhythm or cadence that could offer a scalping opportunity.
Specifically, since the beginning of October 2023, there have been 112 trading sessions. Within this total, 62 sessions saw their opening price start below the prior day’s close. And when this specific event occurred, almost 60% of the time, the session ended up closing positively. Only about 40% of the time did a negative opener lead to a profit for the day.
Further, when a negative opener led to a down day in RUM stock, the average loss came out to 3.51%. On the other hand, when a negative opener led to an up day, the average gain came out to 3.08%.
Trade of the Day: Buy RUM Stock Put Options
If RUM stock opens on Wednesday at a lower price than Tuesday, a compelling idea is to buy the 15 March 2024 $7.50 put option. We buy the put because the conditional probabilities suggest that there is a 60% chance that Rumble shares will fall. If they do, our put option may rise in value.
On Tuesday, the $7.50 put closed with a premium of 18 cents. Let’s assume that RUM stock loses about 1.8%. Using an options calculator, the put may be worth 27 cents. That should give us a sweet profit of 50% — not bad in a day’s work.
Of course, we should calculate risks as well. If RUM stock goes 3.08% the other way — as in up — then the put option would be worth only 16 cents. Now, you’re liable to lose 11%, assuming that you can get the $7.50 put at 18 cents. The loss would be higher if the premium you secured is higher.
Still, with an approximately 60% chance of winning this trade, speculators should think hard about this opportunity.
On the date of publication, Josh Enomoto 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.
