SNAP: Play the earnings upside with optionsSNAP 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
