SODA reports tomorrow morning before the bell so it’s a good time to look at the long biased trade we have on. To recap, here’s the structure:
TRADE: SODA ($57.65) Bought Aug 55/65/75 Call Butterfly for $2.75
- Bought 1 Aug 55 Call for $5.77
- Sold 2 Aug 65 Calls at $1.75
- Bought 1 Aug 75 Call for $0.48
Currently, the trade is slightly profitable with the stock a few dollars higher, but not a bigger winner yet mainly due to the fact that IV is higher going into the earnings report and we’re still quite a bit away from the sweet spot in the structure at 65 in the stock. So the question now is what to do with the structure going into earnings.
There are really only two choices here. Try to take it off before the close for a slight profit or let it ride into the report. Taking it off is understandable as the stock could clearly report worse than sentiment and we could see the stock below our intrinsic structure value of 57.75 tomorrow morning. If the stock gets hit below 55 then the entire cost of the structure is at risk with only 2 and a half weeks until expiration.
Letting it ride obviously has its risks. Like I said above the entire initial 2.75 is at risk if the stock goes down and stays down on the report. But the structure also has big rewards in a short time to the upside. A move and hold above 60 for the next few weeks can turn into a double quite easily and a move back towards the 50 day moving average (65.82) could result in a triple.
Importantly, if the stock is unchanged or even slightly down, the trade is still likely worth more tomorrow than it is today. So in 2 out of 3 scenarios (up, unched), this trade will be a winner tomorrow, which makes us more willing to hold it through the earnings event.
The initial thesis of the trade (stated below) is that U.S. growth remains strong and that alot of the pressure on the stock lately has been due to things that may be a little overstated, like the threat of competition from GMCR. Because of that we’re going to let the structure ride through the report and hope that the support area we highlighted when initiating the trade holds and that upside possibility remains in play into expiration.
[hr]
New Trade $SODA – Gettin’ Busy With the Fizzy
2:58 pm EDT – July 16, 2013 By Enis
SODA is a stock that we first highlighted in March, when we had a nice winner in the name. In May, I laid out the potential for a long-term breakout in SODA in my Name That Trade post:
The price action in Sodastream over the past week has been an absolute battle around an important resistance level. The stock rallied into its earnings number, reported earnings yesterday morning, sold off after the report (which seemed pretty good to me), and then is getting bought hard again today. All of that back and forth, emotional action has occurred as the stock tests its $54-$55 resistance area:
I’ve included the lower volume panel to show the increased interest around this level as the stock has moved back and forth in the past week. While a clean breakout would be nicer, I think the stock has built the necessary energy, and I’m looking for the breakout to hold.
The stock did indeed breakout and did not look back, making it all the way up to almost $80 on that push higher. But July has been unkind to SODA, and the stock has retreated all the way back down to near the $54-$55 breakout area:
I expect prior resistance to act as support going forward. Interestingly, ever since the breakout in May, the stock has been very volatile due to numerous headlines (rumors of KO or PEP being interested in June, and talk today about GMCR coming out with a competing soda product), but very little has come out of the company in the way of fundamental business updates. The stock’s next earnings report is the morning of July 31st. Part of my optimism in the Spring was due to the company’s strong results in the U.S., its main growth market:
Fast forward to yesterday’s earnings release, and the U.S. continues to be the driver of the growth, with little change to recent trends. The U.S. market is by far the biggest opportunity for SODA, and its 90% yoy increase in sales in the U.S. (34% overall, as the rest of the world was only up 10%) is a strong reason for optimism. Its valuation doesn’t seem to reflect that optimism.
Technically and fundamentally, I like the setup, so here’s the trade:
TRADE: SODA ($57.65) Bought Aug 55/65/75 Call Butterfly for $2.75
-Bought 1 Aug 55 Call for $5.77
-Sold 2 Aug 65 Calls at $1.75
-Bought 1 Aug 75 Call for $0.48
Break-Even on Aug Expiration:
Profits: Profits up to 7.25 when stock between 57.75 and 72.25 on Apr expiry, with max profit of $7.25 with stock at 65
Losses: Up to 2.75 between 55 and 57.75, and between 72.25 and 75, with max loss of 2.75 at 55 or below, or at 75 or above.
Trade Rationale: SODA sets up well technically and fundamentally, and the stock’s earnings event before August expiry provides a catalyst for the stock to gain footing near technical support. All of the overhead supply from the past 2 months of price action likely will make it difficult for SODA to rally to the high end of the butterfly, which is why we chose the 55/65/75 strikes for this trade.