Unpacking One of Our Biggest Options Trades of the Year

Breaking down a 469.4% profit on PINS earlier in the summer

Jan 8, 2021 at 2:21 PM
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Part three of our postmortem mini series, is a look back on a resoundingly successful options trade on a red-hot social media stock that helped our subscribers more than quadruple their money. With our three top trades of 2020 coming from the tech, retail, and social media sectors, its clear that trading options offers a variety of ways to get the most out of your money.

2020 is well past the point of hyperbole. But optimism is contagious, and we would be remiss if we didn't remember the successes of the year as we head into 2021. So, we're going to look back at our most lucrative trade recommendation we gave in 2020. Below, we'll explain why we expected the big surge, and how the winning trade unfolded.

Back in the fall, subscribers to our Schaeffer's PowerTrend options recommendation service scored a 469.4% profit on our Pinterest Inc (NYSE:PINS) November 19 call. When we recommended the PINS call on June 30, the social media stock had just broke out above a trendline connecting lower highs since February. A short-term breather had occurred, but it was contained by a confluence of the short-term 40-day moving average and the longer-term 200-day moving average. Plus, the $21.84 area was double PINS' 2020 closing low.

Another price point we were watching was the company's initial public offering (IPO) price of $19, which could act as an additional cushion. And from a qualitative perspective, a visual discovery engine such as Pinterest seemed well-built for the stay-at-home orders of the pandemic. What else was there to do on your couch other than scroll your phone while you watch TV?

Pinterest stock didn't necessarily have a ringing endorsement from Wall Street, either. At that time, 16 of 26 brokerages in coverage maintained "hold" or worse ratings on PINS, so there was massive upgrade potential that could keep the wind at the stock's back. Meanwhile, short interest was near its IPO highs, and accounted for a healthy 20% of the equity's total available float. A capitulation of some of these weaker hands also stood out as a possible tailwind going forward.

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Diving deeper, short-term options premiums on Pinterest stock looked relatively cheap, based on the equity's Schaeffer’s Volatility Index (SVI) that ranked in the low 28th percentile of its annual range. Lastly, the shares had shown a tendency to make big moves in the past year, too, as the equity's Schaeffer's Volatility Scorecard (SVS) came in at 87 (out of 100).

Tucked within the time constraints of the trade was Pinterest's July 30 earnings report, where Wall Street held expectations for a 15 cent loss seemed underbaked. Sure enough, PINS scored a post-earnings pop of 36.1% on July 31, which prompted an avalanche of price-target hikes. We closed the first half of our position the morning of Friday, July 31, when PINS was trading around $34. But PINS wasn't done. From August through October, the equity continued to carve out a channel of higher highs that culminated in another post-earnings pop of 26.9% on Oct. 29. That same Wednesday morning, Oct. 29, subscribers were able to close the final half of the position and lock in a 469.4% profit in just over four months.

Successful trades like these perfectly encapsulate the advantages of options trading. For a lower cost of entry, a trader was able to participate in PINS' breakneck rally in 2020. And if the trade had gone south as some inevitably do, there was limited downside risk. With that in mind, be sure to check out Schaeffer's Top Picks for 2021, a line-up of names that our research team has curated exclusively for our Schaeffer's subscribers.

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Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, January 3.


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