Analyst: China Trade Truce Alleviates Near-Term Risk for ROKU

Recent ROKU option buyers will likely cheer the expected bounce

Managing Editor
Dec 3, 2018 at 9:17 AM
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The shares of Roku Inc (NASDAQ:ROKU) are up 5.9% in electronic trading, after D.A. Davidson upgraded the streaming name to "buy" from "neutral." The analyst in coverage cited the recent U.S.-China trade truce, noting that it "alleviates (but does not eliminate) a significant near-term risk," considering Roku manufactures in China. In addition, the brokerage firm believes competitive risks from Amazon are already priced into ROKU stock.

The news could not have come at a better time for Roku stock. Since its Oct. 1 record high of $77.56, the shares have given back 47% as of Friday's close at $40.75, and turned in consecutive monthly losses of over 23%. However, it appears the shares have found support at the $39 level. Longer term, the equity is trading at almost three times its initial public offering (IPO) price of $14.

In the options pits, the rate of call buying relative to put buying has been quicker than usual in recent weeks. Data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows 26,038 calls were bought to open in the last 10 days, compared to just 4,795 puts. This resultant call/put volume ratio of 5.43 ranks in the 100th percentile of its annual range.

Given that the 10.45 million shares currently sold short represent nearly 14% of ROKU's total available float, it's possible that some of those calls may have been bought by shorts seeking an options hedge. Whatever the reason, it's a prime time to buy premium on the equity's near-term options. The security's Schaeffer's Volatility Index (SVI) of 63% ranks in the 19th annual percentile, meaning short-term options are relatively cheap, from a historical volatility perspective.

What's more, Roku stock has been a strong performer for premium buyers over the past year, based on its Schaeffer's Volatility Scorecard (SVS) of 98 out of 100. In other words, ROKU has shown a tendency to make bigger-than-expected moves during the past 12 months, relative to what its options have priced in.


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