from the desk of Dr. Terry F Allen

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Sea Limited (SE) is Full Steam Ahead

SE is an online gaming and multimedia entertainment company based in Singapore. The company reported earnings in early March that missed estimates on earnings but beat on revenue on a 72% increase from a year earlier while Q4 bookings more than doubled. The stock initially popped following the day of the report but finished flat. SE was then caught up in the tech pullback that pulled the shares 28% lower in just three weeks.

That’s the bad news. The much better news is that the shares found solid support at their 20-week moving average, a trendline that was the site of a reversal higher almost exactly a year ago. The 20-week has been instrumental in guiding the stock on a monster rally that has produced an 8-fold increase in the past year. The recent correction, while dramatic, appears to be done as the stock has gained 14% off the bottom in just the past four days. In short, the rally remains intact and looks to have legs.

SE Chart March 2021 - Huge Q4 Revenue

SE Chart March 2021

If you agree that SE’s uptrend will continue, consider the following trade that relies on the stock remaining above $220 through expiration in five weeks.

Buy to Open SE 16Apr21 210 Put (SE210416P210)
Sell to Open SE 16Apr21 220 Put (SE210416P220) for a credit of $3.90 (selling a vertical)

This credit is $0.10 less than the mid-point of the option spread when SE was trading at $235. Unless the stock rallies quickly from here, you should be able to get close to this amount.

Your commission on this trade will be only $1.30 per spread.  Each spread would then yield $388.70. This reduces your buying power by $1,000 and makes your investment $611.30 ($1,000 – $388.70).  If SE closes above $220 on April 16, both options will expire worthless, and your return on the spread would be 63% ($388.70 / $611.30), or 611% annualized.

As with all investments, you should only make option trades with money that you can truly afford to lose.

Happy trading,

Terry

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