Considering Our Options – Pandora ($P) Put Calendar

by CC August 29, 2014 10:35 am • Commentary

For the past two days, Pandora has been slightly below its 50 day moving average, a development that could prove to be significant since it recently failed to break above its 200 day moving average. About 2 weeks ago when Pandora rallied to that 200 day moving average, we placed a calendar put spread that looked to fade that move higher. Here was the trade and Dan’s rationale:  

I want to use the stock’s strength and the bid in short dated vol as an opportunity to sell a short-dated puts to finance the purchase of longer dated puts.  This put calendar will isolate the company’s Q3 earnings event which should fall in late October.

Trade: P ($27.40) Bought to Open Sept / Dec 25 Put Spread for 1.80

-Sold to open Sept 25 put for .85

-Bought to open Dec 25 put for 2.65

Break-Even on Sept Expiration:

-Max profits with stock at $25 on Sept expiration.

-losses of up to 1.80 if stock is significantly higher or lower than $25 on sept expiration.

Rationale:  The $25 level is the obvious support spot on the chart.  That level is unlikely to break in the near term, which is why selling the Sept 25 put makes sense.  However, there are more than 4 months until December expiration, which is an eternity for a stock like P, so the idea of owning optionality until the end of the year at a reduced cost is a reasonable proposition.  We will also look to spread the Dec puts after Sept rolls off in an effort to further reduce our break-even.

Again I have no idea whether Pandora is a legitimate takeout candidate, and I suspect rumors will continue to swirl, but without the takeover premium, Pandora is likely facing increasing competitive headwinds at a time where fundamentals may not justify current valuation.

At the time we noted that if the stock failed to overtake the 200 day moving average it could set for a retest of support below:

Yesterday Pandora had a massive 10% gain on the heels of some positive commentary from their CFO at two brokerage sponsored conferences.  He was clarifying some details about listening metrics that had caused the stock to decline 10% the day after the company’s Q2 earnings on July 24th.  The stock rallied almost to the penny of the close on July 24th, and stopped at the 200 day moving average (yellow below):

[caption id="attachment_44188" align="aligncenter" width="600"]Pandora 1yr chart from Bloomberg Pandora 1yr chart from Bloomberg[/caption]

Looking at the one year chart 2 weeks later, we see the failed breakout from range as the stock is now back to the lower end ($27 is important) :

[caption id="attachment_44868" align="aligncenter" width="690"]Screen Shot 2014-08-29 at 8.10.23 AM 1 year Pandora from LiveVol Pro[/caption]

The structure we initiated is a small winner here, but on any break below this level, profits will start to pick up. The September short puts are worth a little less than we sold them on decay (despite the stock being lower) but the December puts that we’re long haven’t gained in value. Ideally for this trade to make a lot of money, we’ll need the move lower from here to be gradual and then look for some pickup in December volatility.

The current deltas of the structure are still small at only about -7 right now but that will pick up the closer we get to September expiration if the stock is still above $25 (without being too much higher from here).

Because the calendar is so wide on an expiration basis, it leaves us with a number of options to spread the December puts as we get closer to Sept expiration. If vol does pick up, it evens allows for some sort of vertical calendar (like selling a lower strike in October against the December puts).

We’ll keep an eye on this the next 2-3 weeks and look to adjust when the opportunity presents itself.