We’ve spoken about SNAP stock a bit this week, most recently this morning. And now with the stock hammered from its post-IPO highs (down $10, or about 33%), and hovering just above its IPO price. Anyone who bought the stock prior to the results, but not on the IPO are underwater. Many of those same shareholders are looking for a life-raft.
The next identifiable catalyst for the stock will be its Q2 results that should fall in the first half of August, and then quickly followed by its IPO share lock-up expiration.
So what to do if you think the stock could move back towards the prior highs if intra-quarter data points improve, the company were to beat expectations, and the company possibly manages the lockup expiration well, possibly with a secondary offering, it may make sense to add leverage to existing long position that you are not planning on selling.
One of our favorite leverage overlay strategies with options for equity holders is a 1×2 call spread. This strategy acts like a supercharged overwrite. But unlike an overwrite that looks to collect premium as the stock goes sideways or slightly higher, the ratio call spread adds serious leverage if the stock climbs higher.
For those that would love to get out for no loss in their stock, it’s like a good til cancel sale that raises the effective sale price of the stock if it finishes in the money. Here’s the idea in SNAP:
leverage vs long
vs 100 shares of SNAP ($18.45) Buy the Aug 24/27 1×2 call spread for even money
- Buy to open 1 Aug 24 call for 60 cents
- Sell to open 2 Aug 27 calls at 30 cents each or 60 cents total
Breakeven on Aug expiration – Gains or losses in the shares below 24. Above 24 it’s like having an additional 100 shares of SNAP for the 3 dollars between 24 and 27. Above 27 you are called away in the stock, but rather than a 27 sale, at an effective sale price of 30.
Rationale – Being underwater in a stock sucks. Most in that situation are looking to sell the first rally and move on for less of a loss. Ratio call spreads vs stock have that in mind but are a risk-free way to try to get some of that money back, more quickly on a rally. The strikes can be adjusted dependent on where you would be a seller. This strategy isn’t just for positions that are underwater, they’re also a great overlay anytime you have a sale price in mind, and wouldn’t mind so risk-free leverage into that price. It no way is a hedge.
What we like about these levels is that $24 appears to be technical resistance for the stock’s short trading history, while $27 was basically the high closing price in the stock’s second day of trading, which might serve as near-term technical resistance:
A move above 24 before August expiration means leverage until 27. And a move above 27 is like a sale at 30.