Snowflake stock has made an impressive start to life on the New York Stock Exchange since its IPO in mid-September.
But a big test for Snowflake (SNOW) comes after the close today with the company’s first quarterly earnings release as a publicly-traded company.
The consensus is for a loss of $0.26 per share on revenue of $146.9 million.
The options market is pricing in a 12.50% move for Snowflake stock in either direction.
With so much uncertainty around the earnings announcement, implied volatility for SNOW stock is through the roof at 83%.
High volatility results in high option premiums which can be good for bull put spread traders.
A bull put spread is a defined risk option strategy that profits if the stock closes above the short strike at expiry.
To execute a bull put spread, an investor would sell an out-of-the-money put and then buy a further out-of-the-money put.
Bullish Snowflake Stock Option Trade
Traders who think Snowflake stock will rally, or at least not drop by too much, could look to sell a Dec. 4 285 put and buy a Dec. 4 280 put.
As of Tuesday, this spread was trading for around $1.90, which means a trader selling this spread would receive $190 in option premium and would have a maximum risk of $310.
That represents a potential 61.29% return on risk in three days as long as SNOW stock remains above 285.
If Snowflake stock closes below 280 on the expiration date the trade loses the full $310.
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With this being such a short-term trade, there is no chance to adjust the trade if it goes bad. Trading options over earnings can be risky so for that reason, keeping position size small is a good idea.
I view these as fun trades that either work or they don’t and you have to be prepared to take the full loss if the stock drops.
This trade idea is similar to this NVDA trade that did well, but of course there is not guarantee this one will be as successful.
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/snowflake-stock-consider-this-option-trade-ahead-of-earnings/