Option Trade of the Week – Chip off the Old Blox

Chip off the Old BLOX

Looking back on recent trades in this space, we’re a little heavy on the bearish side of the ledger. Without forecasting where the market is headed (I don’t do forecasts), I feel that we need a put spread to inject some bullishness.  One name that recently popped up is Roblox (RBLX), an online entertainment platform provider.

RBLX reported earnings last week that were mixed. The company suffered a wider loss than a year earlier, which came in lower than analysts were expecting. But revenue came in higher than estimates. One important metric for RBLX is bookings, which grew 22% for the quarter and beat the analyst forecast. The stock jumped 10% in the ensuing two days, pushing it above both its 20-day and 200-day moving average. The shares have traded sideways since then and currently sit between the 20-day and 50-day moving averages.

Analysts mostly cheered the earnings news, giving the stock a couple of upgrades and a few target price increases (there was one decrease). But overall, analysts are lukewarm toward the shares, averaging between a buy and hold. The average target price is also underwhelming, sitting just 6% above Friday’s close. But I’m OK with that because it tells me there’s ample room for upgrades. That’s evident from the two upgrades we saw last week even though the company fell short of the earnings estimate.

This trade is based on RBLX benefiting from its bookings strength and perhaps some more love from analysts. We’re going with a neutral-to-bullish put spread on RBLX with the short put strike (green line) below both the 20-day (blue line) and 200-day (red line) moving averages. If you agree that RBLX will stay atop these trendlines, consider the following credit spread trade that relies on the stock staying above $37 through expiration in 6 weeks:

Buy to Open the RBLX 30 Jun 34 put (RBLX230630P34)
Sell to Open the RBLX 30 Jun 37 put (RBLX230630P37) for a credit of $0.65 (selling a vertical)

This credit is $0.02 less than the mid-point price of the spread at Friday’s $40.01 close.  Unless RBLX surges at the open on Monday, you should be able to get close to that price.

The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $63.70. This trade reduces your buying power by $300, making your net investment $236.30 per spread ($300 – $63.70). If RBLX closes above $37 on June 30, all options will expire worthless and your return on the spread would be 27% ($63.70/$236.30).