One Month In, Options Traders Eye a Floor for SNAP Stock

When it debuted on the New York Stock Exchange back on March 2, Snapchat parent Snap Inc (SNAP) cemented its status as the obligatory major "Tech 2.0" initial public offering (IPO) of the season. The IPO priced at a higher-than-expected $17 per share, but SNAP shares actually opened at $24 -- and then, on its second day of trading, SNAP ventured as high as $29.44 (even as trading volume declined from those heady first-day levels).

The honeymoon for this Wall Street newcomer was brutally brief, though, and from Day 3 on, it's been a tough slog for SNAP. The shares tumbled more than 12% on March 6 to finish below their NYSE opening price of just two trading days prior, and gapped down another 6.6% at the next day's opening bell. Since then, the stock has been unable to retake the $24 level. The March 27 intraday high pierced as high as $24.40, but SNAP settled that session at $23.83 -- just a few pennies above Day 3's thudding close.

All of which is to say that, by the time SNAP options became available to trade on March 10, the stock's post-IPO "blaze of glory" had already long since transformed into something more closely resembling a smoldering pile of rubble. Accordingly, stock traders appear to have lost interest almost immediately. Share volume in SNAP popped north of 65.7 million on the first day of trading, but (as of Friday morning) the 10-day moving average for trading volume arrived at just 4.29 million shares.

SNAP options, meanwhile, were met with a relatively warm reception; approximately 27,000 calls and 87,000 puts changed hands on March 10 alone. Most of the action was centered on the stock's April 18 put strike, which is the current home of 37,345 contracts -- making it the most popular SNAP option by far. SNAP's current lifetime low stands at $18.90, and the stock has recently been hugging the $22 level and its newly formed 10-day moving average (in red on the chart below). Those April 18 puts, then, have never been anything but "out of the money," despite standing 1 point above the IPO price.

And perhaps that's the point, as data from the major options exchanges suggests a convincing majority of those SNAP April 18 puts were sold to open. In other words, these options traders are calling $18 as a likely floor for SNAP (at least over the next three weeks, until April-dated options expire). But given the speed with which so many of the "hottest" tech IPOs in recent years have turned into stock market flops (Box, Square, and Groupon come immediately to mind) this SNAP put selling smacks of overconfidence -- not so much in the sense that it entails wildly ambitious expectations for share price appreciation, but more so in the risk-to-reward profile of selling (ostensibly naked) puts on a stock with "unproven" chart support (and with equity implied volatility levels, a key determinant of premium-selling profits, scraping along historic lows).

In fairness, SNAP is so far outperforming perhaps the most massive tech IPO disaster in recent history, as Facebook (FB) tumbled below its IPO price on its second day as a publicly traded entity. There's also the sad case of King Digital, a lower-profile name that breached its IPO level on its very first session.

But favorable comparisons aside, SNAP's April 18 put sellers just might benefit from the convenient timing of options expiration. Analysts at Nautilus Investment Research recently found that the largest 20 IPOs have tended to peak "38 trading days (two months) after the first trade date on average followed by a substantial four-month decline" -- and, as the calendar would have it, April options will expire on SNAP's Day 37. So while the law of averages may save SNAP premium sellers from having the shares "put" to them this time around, we'd respectfully suggest they opt against rolling their bets out to May.