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TERRY’S TIPS STOCK OPTIONS TRADING BLOG

June 20, 2022

Roku (ROKU) is a stock many believe is in play as a takeover candidate. Netflix and Disney are potential suitors, among others. Whatever the rumor or sentiment, the stock has been flat for the past seven weeks, which is saying something. In fact, since April 27, ROKU is down 2.7% while QQQ has fallen more than 13%.

There’s no denying that ROKU has been a spectacular flop for the past year. The shares are down a whopping 83% from their July 2021 high. But the stock has held up well over the past couple of months with takeover rumors in the air. It may not be advancing, but it’s not falling either. Moreover, the stock appears to have found solid support in the 72-73 area, the site of a two-year low.

One way to see how the market feels about a stock is by looking at equidistant out-of-the-money put and call prices. Currently, calls are trading for more than their corresponding puts, suggesting that the market sees more risk to the upside. That is highly unusual in this market, where most everything has richer put prices. We are therefore trading a put credit spread with the short put strike below the recent two-year low level. 

If you agree that ROKU is in play and will continue sideways at worst, consider the following trade that relies on the stock staying above $70 through expiration in six weeks. Note that ROKU is scheduled to report earnings the day before expiration.

Buy to Open ROKU 29Jul 65 put (ROKU220729P65)
Sell to Open ROKU 29Jul 70 put (ROKU220729P70) for a credit of $1.50 (selling a vertical)

This credit is $0.05 less than the mid-point of the option spread when ROKU was trading at $82.42. Unless the stock surges quickly from here, you should be able to get close to this amount.

Your commission on this trade should be no more than $1.30 per spread.  Each spread would then yield $148.70. This trade reduces your buying power by $500 and makes your net investment $351.30 ($500 – $148.70) for one spread.  If ROKU closes above $70 on July 29, both options will expire worthless and your return on the spread would be 42% ($148.70/$351.30).

November 22, 2021

Target
(TGT) reported earnings before the bell on Wednesday that beat estimates on
both revenue and profits. The company also expects its fiscal Q4 comparable
sales growth to be higher than previous forecasts. Moreover, TGT claimed the
supply chain mess has not been an issue – store shelves are full and ready for
the holiday buying onslaught.

Analysts
were mostly bullish on the report, giving TGT several target price increases
(there was one lower price). One went as high as $350, a 38% premium to
Friday’s closing price. The stock price was not rewarded, however. The shares
dropped 4.7% on Wednesday and slid further the rest of the week. However, this
was a common theme among several retailers, including Walmart (WMT). In fact,
the overall retail sector was lower for the week.

The pullback dropped the shares to just above their 50-day moving average (blue line in chart). This trade is thus a bet that TGT will regain its footing and stay above the 50-day as holiday sales numbers – that are predicted to be robust – start rolling in. The short 245 strike (red line) of our put credit spread is below the 50-day, relying on trendline support to hold through expiration.

If
you agree that TGT will stay atop its 50-day moving average line in chart),
consider the following trade that relies on the stock remaining above 245  (through expiration in six weeks.

Buy
to Open TGT 31Dec 240 put (TGT211231P240)
Sell to Open TGT
31Dec 245 put (TGT211231P245) for a credit of $1.60 (selling a vertical)

This
credit is $0.02 less than the mid-point
of the option spread when TGT was trading around $251. Unless the stock rises
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 $158.70. This
trade reduces your buying power by $500 and makes your net investment $341.30
($500 – $158.70) for one spread.  If TGT
closes above $245 on December 31, both options will expire worthless and your return on the spread would
be 46% ($158.70/$341.30).

November 15, 2021

Affirm
Holdings (AFRM) provides a platform for point-of-sale payments for consumers
and merchants. In August, AFRM announced a partnership with Amazon.com (AMZN)
to offer flexible payment solutions to customers with AMZN purchases above $50.
AFRM reported earnings on Wednesday after the bell that missed on profits but
beat on revenue. The company also raised sales guidance.

Wall
Street apparently forgave the earnings miss, largely because it was not clear
if the discrepancy used comparable numbers. Moreover, AFRM said its AMZN
relationship as a buy-now-pay-later service was exclusive. Clearly, analysts
were looking at AFRM’s growth prospects, as the company was greeted with
several target price upgrades that reached as high as $185 (the stock closed at
$149 on Friday).

After a nasty, four-day 21% plunge heading into earnings that pulled the stock to its 50-day moving average, the stock rebounded 13.7% the day after the earnings news. Given the earnings rebound, analyst target upgrades and deal with AMZN, we are going with a bullish trade on AFRM that keys on the stock maintaining its three-month rally and staying atop its 50-day moving average (blue line in chart). The short put strike of our credit spread sits at $133 (red line in chart), just below the 50-day.

If
you agree that AFRM will continue its uptrend and stay atop its 50-day moving
average line in chart), consider the following trade that relies on the stock
remaining above $133  (through expiration
in seven weeks.

Buy
to Open AFRM 31Dec 128 put (AFRM211231P128)
Sell to Open AFRM 31Dec
133 put (AFRM211231P133) for a credit of $1.85 (selling a vertical)

This
credit is $0.05 less than the mid-point
of the option spread when AFRM was trading at $149. Unless the stock rises
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 $183.70. This
trade reduces your buying power by $500 and makes your net investment $316.30
($500 – $183.70) for one spread.  If AFRM
closes above $133 on December 31, both options will expire worthless and your return on the spread would
be 58% ($183.70/$316.30).

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