- Despite the volatility, interest in the crypto space has rallied shares aggressively in 2021.
- Many investors expect lower prices.
- The technicals are bullish. The play here is to give an investor significant upside while also limiting downside risk.
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SOS Limited (NYSE:NYSE:SOS) came to our attention in recent months due to the clear change in its volume trends. SOS traditionally provides emergency assistance services for its clients in distinct categories such as roadside, health and residential. As we can see from the chart below, the volume profile started to change just after the turn of the year when its crypto intentions came on the scene. This bullish change in volume resulted in shares rallying from just north of $1.30 per share at the turn of the year to well over $15 a share in the space of less than two months. In saying this, shares have lost close to $7 per share since that top in mid February but we still like the bullish set-up for reasons we will get into.
Initially the market became bullish on this stock when the company announced in early January it would be investing aggressively in the crypto mining area. We saw further gains when the company announced a warrants offering to finance its blockchain exploits. The rising prices of Bitcoin as well as its digital asset added further fuel to the SOS bullish story.
This really is the issue with SOS at present. Although the company remains a heavily shorted stock, the market continues to have time for every company which has some type of interest in the crypto space. Suffice it to say, it stands to reason that if the likes of Bitcoin can take out 60,000 shortly and not look back, this trend should continue to act as a solid tailwind for SOS.
From our viewpoint, the fact that SOS is a very liquid stock with a liquid options market and currently trades with high levels of implied volatility definitely brings opportunity to the table. The debate for example on whether management is making a cheap buck or if recently acquired funds will be put to good use remains immaterial at this stage. The fact is that nobody knows. What we do know is that the general market likes what it sees at present and has priced the shares accordingly. In essence, the bullish technicals which we see from the volume trend are merely the result of the bullish fundamentals (currently). This obviously can change on a whim but until we see bearish technicals make themselves known, we would not be interested in taking any short position in this company.
Therefore, the question is how can we set up a trade in this company which will give us significant upside but also control risk to the downside. If we go to the implied volatility chart of SOS, we can see that volatility decreases as we go out in time. Remember, the higher volatility, the higher the option premiums we can collect when selling associated calls or puts. Therefore, we want to be selling options when implied volatility is high and consequently buying when implied volatility is low.
Source : Interactive Brokers
With SOS currently trading at approximately the $5.30 mark, we could buy the June $7.5 call for $0.75 and finance this purchase by selling the May $5 put for $0.95. This would mean that we would be receiving a net-credit of $0.20 for the trade which would mean our cost basis would be approximately $5.10 per share. This would be the scenario if both options expired worthless and we eventually took possession of SOS shares. What are the advantages of putting on a trade like this?
As long as volatility remains high, this gives us the opportunity to defend. If for example, shares of SOS were to penetrate out $5 strike over the next couple of weeks, we (being mindful of volatility erosion) could immediately roll out the position either down and/or out in time to reduce our cost-basis. SOS has an excellent options market with ample liquidity in the monthly expiration cycles. It also has weekly options with far more strike prices. Furthermore, since the stock at present is trading at just over $5 a share, there should be a finite amount of time with respect to how long we would need to roll. This brings significant advantages to how we would go about defending this position.
On the call side, the $7.50 June call has basically 70 days to work out or not. This position gives us unlimited upside and costs much cheaper (with respect to controlling 100 shares at a determined price) than buying shares of the stock outright. This position also can be rolled if shares of SOS were to go down. Suffice it to say, as long as the put rolls could continue to finance the call rolls, one could continue to have significant upside in SOS every month whilst also maintaining downside risk control.
Therefore, to sum up, SOS has clear opportunities at the moment due to its high levels of implied volatility and elevated short interest. We're all about putting ourselves in positions where we have significant upside potential but yet limited downside risk. We look forward to continued coverage.
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This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SOS over 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.
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