By Dan Darrow
October 19, 2022
Today's Trade Ideas
Long Oct28 $12 call
Short Oct28 $14 call
Long Oct28 $10 put
Short Oct28 $8 put
Action Area: $.85 - $1.10
Comments: SNAP is set up well for a volatility strategy on earnings this week. SNAP’s biggest surprise in recent months came in May when the company warned on numbers citing a fast deterioration in the ad space. The drop on SNAP into the low teens was one it has not managed to recover from, with July’s weak report sending the stock down into the single digits. SNAP has sat in a tight range between ~10 and ~12 since July’s earnings release and is set up well for a resolution of the range this week when the company turns in results. The stock moved nearly 40% on the day of its print in July, but this week’s straddle is only pricing in an ~19% move, and even if it doesn’t repeat the magnitude of the move from July, a ~$2 expected move will be enough to resolve the consolidation and start a sustained breakout/breakdown. The Oct28 strangle will go one week past earnings (and will go through more catalysts for the stock next week with GOOGL and META reports) and will be targeting a move of $2+ in either direction. The short-term strategy will have no stop until after earnings are released, and a lack of movement will take a toll on the contracts, so be sure to plan your size accordingly.
Strategy: Long Call
Contracts: Long Nov18 $26 call
Action Area: $1.05 - $1.35
Comments: BKR is a speculative bullish trade. BKR turned in a solid report this morning and had a strong session, decisively clearing the 50day sma and multi-month downtrend resistance. The stock has been significantly underperforming peers SLB and HAL, and today’s print could be the jump-start it needs to play catch up. Above the 100day sma (26.68), BKR should build momentum for a move to 28.22 (7/19 earnings gap) and the 200day sma above it (29.30), and strength across the Energy space should provide a near-term tailwind. The Nov18 call will be targeting an initial move to 27+ to begin locking in money, and the swing trade will have a tight stop below 24.75. The trade is more speculative because we typically give fast post-earnings setups a few sessions to let the 8day ema join.
On The Radar
Recent quarters from SNAP (and the May warning) have proven to be major catalysts for the Social Media names, so PINS is likely to be in play this week. The stock has rolled off the key 25 level from earlier in October, and it is sitting around 23 and the moving average congestion zone (the 8day ema, 20day sma, 50day sma, and 200day sma are between 23-23.50). The Nov18 call spread has been trading around the net debit stop loss range, but I thought it made sense to keep it open into SNAP earnings and its own report next week (10/27). Depending on the action tomorrow, the plan may be to open a short-term put spread hedge on PINS to carry through the end of October in case the stock gets hit on news. Once the option books fill out tomorrow morning, we will see what the pricing looks like on short-term puts and make a decision on a spread. Stay tuned!
MDGL is not making it easy. Volume has been steadily increasing on the Nov18 options and the bid/ask spreads are tightening on the contracts, but the action area for the strangle is not dropping below $6.00 - $7.00. Risking that amount to max out at $10.00 (if one side of the strangle maxes out at expiration) is not even a 2:1 risk to reward, which doesn’t make a ton of sense for a trade. If the pricing doesn’t drop in the next two sessions, we will need to adjust the contracts and/or walk away from the trade idea. There will be an update by Friday on this one.
Trader Author Portfolio Holdings
**As of 4pm ET October 19, 2022