Snap stock was IBD’s Stock Of The Day yesterday. Here’s a calendar spread option strategy setup to consider if you are bullish on the stock.
After an impressive gap-up on its last earnings report and subsequent consolidation, Snap (SNAP) looks like its setting up for another run at the 52-week high around 80. It shows improving relative strength and is holding above a rising 50-day moving average.
SNAP stock also has an IBD Composite Rating of 94 and an IBD Relative Strength Rating of 97. The EPS Rating of 65 is a little lackluster, but the acceleration in revenue growth makes up for some of the weakness.
Snap stock is also a member of both SwingTrader and Leaderboard. A bullish calendar spread offers traders a way to profit with very little risk by using options.
Snap Stock Calendar Spread Setup
A calendar spread involves selling a short-term option and buying a longer-term option with the same strike price.
For Snap stock, traders with a price target of 80 could use that as the strike price for their calendar spread.
As of yesterday, selling the 80-strike call option expiring Sept. 10 generated around $135 in premium. Buying the Sept. 17 call at the same strike went for around $180.
That resulted in a net cost for the trade of $45 per spread, which is the most the trade can lose. Snap stock is trading lower today, altering the prices a bit, but the net cost is around the same.
The estimated maximum profit is around $160 for a block of 100 shares. However, that can vary depending on changes in implied volatility for Snap stock.
Profiting On The Trade
If Snap stock trades up to around 80, the calendar spread will increase and result in a net profit.
A bullish calendar spread is a good way to gain some upside exposure on a stock without risking too much if the move doesn’t work out as planned.
The ideal scenario is a rise up to 80 around September with little change (or a rise) in implied volatility.
As for earnings risk, Snap stock is due to report earnings in October. Since that is beyond the expiration date, there is no earnings risk with this trade.
Apple (AAPL) is another stock to consider for this bullish option strategy. AAPL stock consolidated sideways for five weeks and could be ready for the next push to the upside. It was already featured as a double calendar spread a couple of weeks ago.
Remember options are risky. 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-offers-opportunity-for-bullish-calendar-spread/