One Trader Expects Big Wins for Snap Stock After Earnings

One SNAP trader may have opened a January bull spread

Managing Editor
Oct 17, 2019 at 2:04 PM
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Snapchat parent Snap Inc (NYSE:SNAP) is moving higher this afternoon, last seen up 1% at $13.80. SNAP has had a noteworthy year on the charts, now up 150% in 2019, and just off a double top near the $18 level. In recent weeks, the stock has pulled back -- and its 14-day Relative Strength Index (RSI) is bordering on "oversold" territory -- but has benefited from a double layer of support at both the $14 level and its 160-day moving average. Plus, SNAP options are active today, and one options trader may have initiated a bullish spread ahead of earnings next Tuesday, Oct. 22.

Daily SNAP with highlight and 160MA

This afternoon, SNAP's call volume is pacing for the 75th percentile of its annual range. Currently, more than 62,000 calls have changed hands, more than three times the 18,000 puts traded. Some of the most active options are the January 2020 10-strike put and call, where a bullish spread may have been initiated.

More specifically, it looks like a trader bought to open 2,065 January 10-strike calls for $4.20 apiece, and then partially funded the position by selling to open an equal amount of January 10-strike puts for $0.30 each. As such, the trade was opened for a net debit of $3.90 per spread, or $805,350 total (number of spreads x 100 shares per contract x debit). The trader will profit the higher SNAP moves above $13.90 (strike + debit) in the options' lifetime.

Had the trader simply bought the 10-strike calls, they would've paid $4.20 apiece, and wouldn't profit until SNAP topped $14.20 (strike + premium paid). However, their profit potential would be theoretically unlimited to the upside, increasing the higher the shares rallied north of breakeven before the options expire in January.

However, bullish option bets are nothing new for SNAP. The equity's 10-day call/put volume ratio across the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) comes in at 6.68 and ranks in the 99th annual percentile. This shows a stronger-than-usual demand for long calls relative to puts in recent weeks.

Even further, the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.37 ranks just 2 percentage points from an annual low, meaning call open interest easily outranks put among contracts expiring within three months.

However, some of the recent call buying -- particularly at out-of-the-money strikes --- could be attributable to short sellers seeking an options hedge ahead of earnings. Short sellers have been busy on Snap stock, with short interest rising 23% during the past two reporting periods. It now accounts for 17% of the stock's total available float, or almost a full week's worth of pent-up buying power, at SNAP's average pace of trading.

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