Snap stock was added to Swing Trader last week with a buy zone of 61 to 62.53.
Snap (SNAP) is ranked No. 5 in the internet content industry group, behind Facebook (FB), and has an impressive Composite Rating of 94 and a Relative Strength Rating of 93. The only blemish is an EPS Rating of 71.
Traders can go long on the stock, but aggressive investors can use options to trade a leveraged position via a strategy known as a poor man’s covered call.
To execute a poor man’s covered call, the trader will buy a long-term, deep in-the-money call and sell a short-term out-of-the-money call.
The long-term bought call effectively replaces the long stock position at a fraction of the cost.
To trade a covered call on Snap stock, an investor would need to buy 100 shares at a total cost of around $6,180.
A similar exposure can be obtained through buying a Jan. 21, 2022-expiring call with a strike price of 50. That call was trading on Friday for around $17.20, or $1,720, which is much less than it would cost to purchase 100 shares of Snap. On Friday, Snap stock closed at 61.82.
The trader can hold that call as a bullish trade or sell monthly calls against that position to reduce the cost and generate some income.
For example, selling a June 18 call with a strike price of 70 would generate $190 in premium and still provide some capital-gain potential.
Leveraged Position in Snap Stock Raises Risk
The downside of the trade is that gains and losses will be magnified because you are effectively trading a leveraged position.
In terms of risk management, I would rethink the position if Snap stock dropped below 57.50. The suggested stop loss on Swing Trader is 58.36, or the first decisive close below the five-day moving average.
The delta of the initial position is 48, which means the exposure is equivalent to owning 48 shares of Snap, although this will change over time as the stock moves.
Snap’s earnings are estimated to be around July 22, so this trade would have no earnings risk until then.
It’s important to remember that options are risky and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
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View more information: https://www.investors.com/research/options/snap-stock-how-to-trade-leveraged-covered-call/