How To Play The Recent Pop In Snap

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About: Snap Inc. (SNAP)
by: Samantha LaDuc
Summary

SNAP has experienced recent strength in its stock price, which should continue into its next round of earnings.

There are several options strategies that investors can implement to take advantage of this.

There will be some weakness after earnings, but the stock will strongly recover.

There are market contagion risks that could weigh down on SNAP's overall performance and prevent it from hitting my price target.

Snap (NYSE:SNAP) is up 206% since 12/21/18 lows, the lows of $4.82 that even the most bearish fundamental analyst from its IPO days (with $10 price target despite $30 IPO) classified as "oversold".

SNAP has had some exciting news over the past few weeks. Things are finally going right for the company that has lost 2/3rds of its market value since its IPO. Snap Show, announced on July 10th of 2019, will draw influencers to the app, which will help direct consistent traffic to Snapchat, build up its infrastructure and boost ad revenue.

Snap launched 50 shows during Q1'19 to a strong and positive response from users. The filters that they implemented in May doubled the number of app downloads from 600k a day to more than 1.5 million. They cleaned up the Android app, boosting their base by 6%.

SNAP's ad revenue growth grew 36% during Q4'18, and they expect to continue to tap into that growth as Snap Show and Collection Ads continue on the uptrend. Things are looking good for the company going into this next round of earnings on July 23rd.

Based on my technical observations, things are strong for SNAP going into the end of the month. I believe that they have the potential to hit a $20 price target, and there are several options plays that investors can implement to take advantage of that. I do think that there will be a ~20% drawdown immediately after earnings, but the stock will recover in the months following, potentially reaching beyond its IPO price.

My Technical Observations

SNAP was oversold in December 2018 when liquidity entered the markets and short coverings helped to bring the price action inside the Keltner Channel (KC), then above the 10 week moving-average, then a cross of 10 to 21 week moving average. There was a continuation above the Keltner Channel until April, when SNAP pulled back to the pink trend-line that connects the IPO high to the February 2018 earnings beat. That represented a pullback to buy, as represented by the yellow arrow.

snap Source: Author

The combination of support at 30-week with the 50-week trend-line at $10 fair valuation allowed SNAP to continue on the uptrend along the 10-week moving average to a $14.47 neckline, where it has been trading sideways the last few weeks.

The inverse Head and Shoulder formation is shown below, beginning with the May 2018 $10 bounce to $14.47 and then down to the December 2018 lows of $4.82, before returning back again to the $14.47 neckline in June 2019. A total of a $9.65 higher, and a $24.12 measured move.

Source: Author

Fibonacci analysis shows $16.19 as 78.6% retracement, $17.86 at 100% retracement, and $20 at a 127.5% retracement. This point could be an area where SNAP pulls back. I believe that this drawdown will follow earnings, and could be 20%, should market weakness persist into late July and August.

Source: Author

Interestingly enough, SNAP has had a similar chart look to PAGS, a Brazilian software application unicorn that has flown higher after a pull-back to trend-line support and neckline breakout. SNAP will take out its "IPO High" after staying above $21.22. The higher "PAGS-like-number" above IPO is $30.50, which will more than likely happen after the 20% pullback post-earnings this summer, and despite of markets tendency to trade sideways-to-lower into 2020. The risk is that market action prevents SNAP from following the PAGS fractal and achieving its measured move this year.

Source: Author

Short-Term Bullish Option Ideas

SNAP has earnings on July 23rd, and the below trades give investors exposure to any upside movement that could happen before this day.

Hard Run: Buying the July 26 $15C for $1.15 with a price target between $16.25 and $17.50 before July 23, assuming that the price can stay above $14.

Slow Grind: The August 15x16 Call Spread for $0.40 for a potential profit of $1.00. The stock price needs to stay above $14 and close at $16. I personally prefer not to hold call spreads into EPS, and I prefer financed call spreads like the Aug 16 15x17 call spread with a short $14.5 Put for a small debit. Or there is a ratio call spread with 2 Long OTM Calls to 1 Short ITM Call like the Aug 16 $16x2 with a short $14 call for $0 debit.

Medium Term Bullish Option Ideas

Into and After Earnings: The October $16 Call for $1.50 with $20 price target. A volatility crush after earnings would hurt this option price if the expected move is not exceeded, but there is time built in for the price to recover after earnings if the stock continues on the uptrend.

EPS Play With Theta: January 2020 $15x20 call spread with a short January 10 put for $0.40. Assuming that the spread doesn't trade below $15, this trade can deliver between 8-10x return on investment if SNAP reaches the $20 price target.

Very Bullish: Buy the October 16 Call and Sell the October 14 Put for $0.30. Selling puts to offset buying calls will be financially rewarding if the trade is directionally right. Otherwise, the debit turns into a credit and would turn into a loss greater than the investment. Worst case scenario, you lose the value of your investment, and are exercised at $14 level at expiration.

Conclusion

SNAP will more than likely touch $20 before July 23 earnings, after which they will have a subsequent 20% pullback, especially if market weakness persists into the end of the summer. I expect the stock to recover after earnings, with a momentum price target of $30.50. There are some risks to getting there, including continued overall market weakness and uncertainty. However, there are both short-term and medium-term ways to play the recent pop in SNAP, which will benefit investors across several different preferred risk levels.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Important Disclosure: LaDuc Trading/LaDuc Capital LLC Is Not a Financial Advisor, RIA or Broker/Dealer. Trading Stocks, Options, Futures and Forex includes significant financial risk. We teach and inform. You enter trades at your own risk. Learn more.