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).