LYFT-Out of the Woods?

by Dan November 21, 2019 2:28 pm • Trade Ideas

Yesterday on CNBC, LYFT”s co-founder, and President, John Zimmer sat down with Wildred Frost and I suspect that it is this quote that has the stock up 5% as I write:

“I feel like the stock is undervalued. We’ve had three-quarters of beating expectations, and over time people will see us put up more numbers and it will solve itself.”

The stock is down about 35% from its $72 IPO price in April, so I guess it is good to hear that management views the stock as “undervalued”, and with its short interest near its lows at under 10% of the float, and the stock approaching the breakdown level from early September, maybe the stock is set to run into year-end?

As for the prospects of a year-end run, I have to think that there is no shortage of stake-holders in the LYFT story who would love to see this stock close 2020 as close to its IPO price as possible. While $72 seems like quite a haul, $60 might be attainable in the next couple of months? Would I buy the stock here playing for a short term move to $60? No, might I look to define my risk with a call spread to do so? sure, if I was of the mindset that shorts are washed out and holders who are underwater from the IPO might look to “mark” the stock up into year-end…

So what’s the trade?

With the stock at $46.20 the Jan 50 – 60 call spread costs $1.60, buying 1 Jan 50 call for $1.90 and selling 1 Jan 60 call at 30 cents. This trade risks 3.5% of the stock price, breaks-even up at $51.60, up 12%, but has a potential payout of $8.40, or 18% of the stock price if it is up 30% in a little more than two months. The options market is saying there is only about a 10% chance of that happening, but it is also saying there is about a 33% chance that the trade is break-even, which is not exactly horrible odds to be in the game if you think the stock has room to run.