Chewy on This Trade

Chewy (CHWY), the online pet food and supply retailer, reported impressive earnings last week that beat estimates on profits and revenue. Adding to the good news, CHWY raised its full-year 2021 revenue guidance, although it lowered Q2 guidance due to short-term supply chain issues. 

The stock started 2021 on a solid note, gaining more than 30% through mid-February to hit an all-time high. But then like many “pandemic stocks,” CHWY dropped sharply, falling more than 40% during the next three months. However, the shares have been on the upswing for the past month. In fact, the stock has moved above its 50-day moving average, a trendline that has flattened out after its first decline since late 2019. We expect CHWY to continue its uptrend, staying above the 50-day. The short put of our credit spread is just below the 50-day, so support at this trendline should keep the spread out of the money.

If you agree that CHWY will stay above its 50-day moving average, consider the following trade that relies on the stock remaining above 76 through expiration in six weeks.

Buy to Open CHWY 30Jul 72 put (CHWY210730P72)
Sell to Open CHWY 30Jul 76 put (CHWY210730P76) for a credit of $1.40 (selling a vertical)

This credit is $0.03 less than the mid-point of the option spread when CHWY was trading above $78. 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 $138.70. This trade reduces your buying power by $400 and makes your net investment $261.3 ($400 – $138.70).  If CHWY closes above $76 on July 30, both options will expire worthless and your return on the spread would be 53% ($138.70 / $261.30).