August 22, 2022

Sea of Trouble

Sea Limited (SE) is a Singapore-based company that provides digital entertainment and e-commerce services. The company reported earnings on Tuesday before the bell that showed a wider loss than a year earlier, though analysts had expected poorer results. Revenues rose from a year earlier but failed to meet the consensus expectation. Perhaps more importantly, SE did not report revenue guidance due to “increasing macro uncertainties,” whatever that means.

Although there are few analysts covering SE, most consider the stock a buy. In fact, three reiterated their buy or overweight ratings after the dismal report. Moreover, the average price target for SE stands at an absurd $138, more than double the stock’s Friday close. This looks like an opportunity to play contrarian, since analysts are notably bullish on a stock that has cratered 82% in 10 months. Perhaps some analysts will come to their senses and downgrade the stock and lower their price targets, which would pressure the shares.

On the charts, the stock plummeted 25% after earnings through the Friday close. The plunge pulled the shares below both the 20-day and 50-day moving averages. We are thus playing a call credit spread with the short call sitting on the 50-day (blue line).

If you agree that SE will be unable to stage a rally after a dismal earnings report and continued meddling by Chinese authorities, consider the following trade that relies on the stock staying below $76 (red line) through expiration in six weeks:

Buy to Open the SE 30Sep 79 call (SE220930C79)
Sell to Open the SE 30Sep 76 call (SE220930C76) for a credit of $0.75 (selling a vertical)

This credit is $0.03 less than the mid-point price of the spread at Friday’s $67.67 close. Unless SE falls quickly, 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 $73.70. This trade reduces your buying power by $300, making your net investment $226.30 per spread ($300 – $73.70). If SE closes below $76 on September 30, both options will expire worthless and your return on the spread would be 33% ($73.70/$226.30).

August 15, 2022

Cooking Without Gas

Electric-vehicle maker Rivian Automotive (RIVN) reported earnings on Thursday afternoon that met on earnings but easily beat on revenue. In fact, revenue was up 283% from the previous quarter. But the company also warned that 2022 losses would be wider than expected. However, preorder growth is strong, and the company reiterated its projection of producing 25,000 vehicles this year.

The market didn’t seem to know how to take to the news. Analysts reacted with target price increases and decreases, though there were no ratings changes. The target price spread is ridiculously wide, ranging from $24 to $147. The average is $60.31, which is 55% higher than Friday’s close. The stock closed flat on Friday.

What is much clearer, however, is that the stock is in a substantial uptrend, gaining nearly 60% in the past six weeks. This rally has been guided by the 20-day moving average, which currently sits at $34.76. Note that the short put strike of our credit spread (34) is below the 20-day, so continued trendline support should keep our spread out of the money.

This trade is a bet that RIVN’s revenue growth will outweigh its bottom line losses, much like Amazon in its early days. If you agree that RIVN will continue to rally above its 20-day moving average (blue line), consider the following trade that relies on the stock staying above $34 (red line) through expiration in seven weeks:

Buy to Open the RIVN 30Sep 32 put (RIVN220930P32)
Sell to Open the RIVN 30Sep 34 put (RIVN220930P34) for a credit of $0.50 (selling a vertical)

This credit is $0.02 less than the mid-point price of the spread at Friday’s $38.90 close. Unless RIVN surges quickly, 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 $48.70. This trade reduces your buying power by $200, making your net investment $151.30 per spread ($200 – $48.70). If RIVN closes above $34 on September 30, both options will expire worthless and your return on the spread would be 32% ($48.70/$151.30). 

28 July 2022

Go With the Pro

Prologis (PLD) is a real estate logistics company, leasing properties to businesses in 19 countries. The company reported earnings on Monday before the open that beat profit and revenue estimates. PLD also raised guidance for FY22. There were no upgrades or downgrades on the news, but a few target prices were lowered. This is normal these days as analysts are lowering targets across the board to keep up with the bear market. Despite a few reductions, the overall target is $161, 27% above Friday’s close.

The stock reacted with a 1.5% drop on Monday after reporting but recovered to close the week with a 4% gain. More importantly, the shares bounced off the support of the 20-day moving average, a trendline that is now pointing higher for the first time since April. That was just as PLD was embarking on a 40% slide that took less than two months. But the stock has gained 19% off its June 13 bottom to close at its highest point in more than five weeks.

This trade is based on PLD continuing its recent uptrend, buoyed by the support of its rising 20-day moving average. Note that the short strike of our put spread is below the 20-day, meaning the stock will have to pierce this support to move the spread into the money.

If you agree that the 20-day moving average (blue line) will continue guiding PLD higher, consider the following trade that relies on the stock staying above $120 (red line) through expiration in eight weeks:

Buy to Open the PLD 16Sep 115 put (PLD220916P115)
Sell to Open the PLD 16Sep 120 put (PLD220916P120) for a credit of $1.10 (selling a vertical)

This credit is $0.05 less than the mid-point price of the spread at Friday’s $126.90 close. Unless PLD increases quickly, 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 $108.70. This trade reduces your buying power by $500, making your net investment $391.30 per spread ($500 – $108.70). If PLD closes above $120 on September 16, both options will expire worthless and your return on the spread would be 28% ($108.70/$391.30). 

Any questions?  Email Terry@terrystips.com

18 July 2022

Don’t Bank on It

Wells Fargo (WFC) posted earnings on Friday morning that were underwhelming. Profits declined 48% from a year earlier, while revenue and earnings both fell short of expectations. Yet the stock soared 8% before closing 6.2% higher. Why the jump on seemingly bad news? It’s anyone’s guess, though it’s typical to parse the data to spin a bullish story. For WFC, it was strong net interest income. Whatever.

Oddly, there was no analyst activity following the report. No upgrades or downgrades. No target price changes. WFC remains a solid buy among the 30 or so covering analysts, while the target price average is $53.36, 30% above Friday’s close. I guess analysts don’t like to criticize their peers.

Analysts haven’t been getting a whole lot right with WFC this year. Despite the glowing predictions, the stock is down more than 30% from a February high. And Friday’s rally was soundly rejected by the 50-day moving average, which marked tops in March and June. In fact, the trendline hasn’t allowed a daily close above it since late February.

Parse the data all you want. WFC came up short on the big numbers. Consider this a “fade the rally” trade that is banking on WFC’s downtrend continuing. We are using a call credit spread with the short call strike (red line) sitting above the 50-day moving average (blue line).

If you agree that the 50-day moving average will continue guiding WFC lower, consider the following trade that relies on the stock staying below $43 through expiration in six weeks:

Buy to Open the WFC 26Aug 46 call (WFC220826C46)
Sell to Open the WFC 26Aug 43 call (WFC220826C43) for a credit of $0.70 (selling a vertical)

This credit is $0.02 less than the mid-point price of the spread at Friday’s $41.13 close. Unless WFC drops quickly, 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 $68.70. This trade reduces your buying power by $300, making your net investment $231.30 per spread ($300 – $68.70). If WFC closes below $43 on August 26, both options will expire worthless and your return on the spread would be 30% ($68.70/$231.30).