About a month ago, when some of the high fliers seemed to put in a short term bottom in their corrections, we placed a bet on Pandora with the thought that the entry provided a decent risk reward profile, and the potential for a lottery ticket if any take-out rumors surfaced over the summer. Since we initiated the trade structure P is up a few dollars and our chosen structure is doing well. But with the stock now touching short term resistance it’s a good time to consider our options on the trade. To recap, here was the structure and the rationale:
TRADE: P ($22.50) Bought to open Sept 28/35 Call Spread for .95
-Bought Sept 28 Call for 1.45
-Sold Sept 35 Call at .50
Break-Even on Sept Expiration:
Profits: btwn 28.95 and 35 make up to 6.05 with max gain of 6.05 above 35
Losses: btwn 28 and 28.95 lose up to 95 cents, with max loss of .95 below 28
Rationale: Pandora, like most high valuation/high growth stocks has had a big move from its highs, and further movement down is likely dependent on the broad market at these levels. If the broad market plays catch up to the downside, I would expect the round-tripping to take place, but if large caps continue to hold, smaller cap more speculative names will likely put in a short term bottom soon. Playing for a bounce from here and any potential rumors of it becoming an acquisition target should only be done through defined risk structures. This structure plays for that potential while defining risk to $1 in case these momentum stocks have more risk to the downside here.
The structure is worth about $1.50 here. The stock but in a nice bottom near where we initiated but is now hitting resistance at its declining 50 day moving average:
The good thing for Pandora is alot of the other stocks that have bottomed and hit their declining 50 day moving average recently have gapped higher once they were able to get above it.
Since there were two reasons we did this trade, with the first being what we thought was a decent entry and the second being a possible takeover target with M&A activity heating up, we’d like to see how the stock acts on a technical basis before deciding if it’s worth waiting around for any rumors.
One rumor out there right now is Google sniffing around for music streaming service Songza. I’m a little skeptical of the details of the rumor as the rumored deal price of 15 million seems off exponentially considering the valuation of its competitors (that dollar amount is from the NY Post so take that with a massive grain of salt) but a deal for one of the smaller streaming services makes sense for Google as they are reportedly working on integrating that sort of thing with YouTube and probably want to make a move since Apple’s purchase of Beats heats up the Android iOS war.
Pandora was initially down on the Songza rumor but I would think that all in all it’s a positive for Pandora as the big boys are nervous about missing out on these things.
So the issue with our structure is that it’s still pretty far out-of-the-money, although it’s in September which means decay really isn’t an issue at this point. (theta is about zero)
So what we’re going to do is continue to watch how the stock trades on a technical basis. If it does in fact get above $26 soon, it could very easily gap higher towards its 200 day moving average near $28. At about 25 deltas here, and about 35 deltas at $28 the structure would be worth more than a double and we’d probably close there since it would simply be at the money at that point. That is unless there were more specific, concrete rumors in the stock.