3 Reasons We're Targeting a Triple on Stamps.com

We recommended STMP call options to our Weekend Player subscribers in December

Dec 11, 2019 at 12:38 PM
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Building on our comments as displayed on the accompanying chart, the price action in Stamps.com Inc. (NASDAQ:STMP) in recent years can be divided into five very distinct periods, viz. 1) An enormous, tenfold rally (though not without its major fits and starts) that drove the shares from the upper-$20s in the spring of 2014 to a peak above $285 in June 2018, 2) A rapid decline that ended with a 50% haircut over the following six months (with the December 2018 low just north of $141), 3) A rally off the December lows of just under 50% to a February 2019 peak at $207, 4) A "full-stop," event-based freefall over the next three months -- a decline that did not find stability until the $33 level was breached to the downside in May 2019, and 5) A recovery into the October-November period to the upper-$90s (peaking at more than triple the May lows), with pullbacks from peak levels contained to within 20% of November's high at $97.50.

With so many "trapped" longs -- those who entered positions in the $100s (or in the $200s) -- the $100 level for STMP is endowed with an even greater level of significance as potential "immovable" overhead resistance than is generally the case for names attempting to break into the "triple-digits" for the first time. So, a very legitimate question would be, despite STMP's impressive rally off the lows, and its streak of 15 consecutive quarterly earnings beats that has even survived the turmoil in the share price as described above, and the almost incontrovertible fact that STMP will benefit (potentially "hugely") from the shiny new alliance it recently announced with United Parcel Service (UPS): Do STMP shares possess the "stones" (over the next 30-60 days) to actually break out above $100?

Our response to that question is three-fold.

  1. Based on Friday's closing prices, our recommended STMP call option would reach its targeted profit of 200% over the recommended holding period on a rally to $99.50 by STMP. This isn't snark -- it's just our way of highlighting that the century-mark was very much on our radar when we developed this STMP call recommendation, and that we noticed STMP's short-term options were cheap enough to be trading at 52-week implied volatility (IV) lows, which thus rendered our recommended call capable of tripling on an STMP rally that fell shy of the triple-digit levels.

  2. That said, we do believe that buyer support for STMP is very strong near current levels (in a general sense as indicated by the horizontal line at the $80 level on the chart, and by our concurrent confidence in the support potential of the 50-day moving average) but, more specifically, by the multiple support levels also enumerated on that chart.

  3. And we believe, as well, that there's real potential for a positive announcement by STMP over the next 60-days regarding the extent of the contribution to financial results of their new UPS relationship as it gradually rolls into STMP's results (a subject that STMP senior management addressed in a very conservative manner when questioned on the most recent earnings call). And that any such positive announcement by STMP would likely be a precursor to a serious gap-based rally -- and one that could derive additional fuel from the ongoing heavy contingent of STMP short sellers, as well as from upgrades by a relatively unenthusiastic corps of STMP analysts, who maintain an average 12-month price target a few points shy of the recent highs.

We've recapped above the core information on our recommended STMP call option, on which we are targeting a triple. Also of interest is the fact that Trade-Alert's IV compilation for STMP indicates that 30-day at-the-money IV is at 36%, with IV for the January 2020 expiry at 41% (and IV for the earnings-inclusive February 2020 expiry at 62%). But also note (again, based on Trade-Alert data) that the average of STMP's 30-day, 60-day, and 120-day realized volatility checks in at a robust 56% -- and also that STMP shares are far from 100% dependent on post-earnings report price swings as proximate causes for major pops in upside (or downside) volatility.

stmp daily chart on dec 8

Subscribers to Schaeffer's Weekend Player options recommendation service received this STMP commentary on Sunday, December 8, along with a detailed options trade recommendation -- including complete entry and exit parameters -- straight from Bernie's trading desk. Learn more about why Weekend Player is one of our most popular options trading services.

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