SNAP: Play the earnings upside with options

SNAP held it ground yesterday, ending the day up in good volume in a terrible market. This confirms that the stock is heavily shorted (c. 30%) and has a limited propensity to fall further from here. It also augurs well ahead of earnings , but is no guarantee of performance as the stock has proven to be extremely volatile, especially around company releases.

In this tricky, consolidating market, buying any stock outright is dangerous. So how to mitigate risk and play the potential upside nonetheless?

For traders who own this name already --> Sell the shares and buy ATM calls on the next expiry. This allows to remove the risk while keeping the exposure. For traders who do not own the shares --> buy ATM calls on the next expiry.

1. GOOD EARNINGS , STOCK FLIES --> Convert into shares or sell the calls at a profit
2. POOR EARNINGS , STOCK TANKS --> Lose the premium on the calls and sell an ATM put to make it up
3. STOCK DOES NOTHING --> This is the worst-case scenario, you lose the call premium and move on
Comment: After a strong day yesterday in a tough market, there is some follow-through today and SNAP is currently trading above the resistance of its descending channel. This is another good sign for the stock, validating the strength and the strategy outlined above.
Comment: Best case scenario #1 unfolding, as the stock soars >+25% in after hours trading post earnings.
Trade closed: target reached: Blowout numbers. Pay special attention to the 5% sequential increase in Daily Active Users to 187m, representing an 18% year-on-year advance. This results in a significant increase in revenues, and is coupled with higher ARPUs (Average Revenue Per User). It seems that SNAP ain't dead yet. With the shares still up more than 20% pre-market, the best scenario will be to convert the shares and hold on to them. Opportunistic, short-term traders may still sell the calls and pocket some 20% in 2 days. ;-)
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