Snap Options Traders Get Defensive Ahead of Earnings

Snap stock will get its first chance to react to earnings in Thursday's session

May 9, 2017 at 3:26 PM
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After tomorrow's close, Snapchat parent Snap Inc (NYSE:SNAP) is slated to unveil its first quarterly earnings report since going public in early March. Canaccord Genuity and Loop Capital said Snap's direct active user (DAU) number is the one to watch amid increased competition from Facebook Inc (NASDAQ:FB), with the brokerages maintaining respective "underweight" and "hold" ratings ahead of earnings. SNAP options activity has been heating up ahead of the event, too, though today's activity echoes the growing skepticism seen toward the shares ahead of earnings.

By the numbers, 40,000 puts and 27,000 calls have traded on SNAP so far, two times what's typically seen at this point in the day. The weekly 5/12 21.50-strike put is most active, due to a 10,341-contract block that was likely bought to open for $930,690 (number of contracts * $0.90 premium paid * 100 shares per contract). This is the most the put buyer stands to lose, should SNAP settle the week north of $21.50. Profit, meanwhile, will accumulate on a move below breakeven at $20.60 (strike less premium paid) before the options expire on Friday.

Today's put-skewed session just builds on yesterday's options trading, when roughly 59,000 puts and 34,000 calls changed hands. The most notable trade on Monday was a block of 17,809 May 21.50 puts that was bought to open for $0.90 apiece, or about $1.6 million. Unlike the weekly 5/12 puts, these monthly May options don't expire until next Friday's close. The May 21.50 put is now home to peak open interest in the front-month series, with nearly 18,500 contracts outstanding.

Despite this bearish positioning among pre-earnings options traders, the withstanding trend in SNAP's options pits has been toward long calls. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculative players have bought to open 38,987 calls in the last 10 trading days, compared to 16,215 puts. 

Regardless of whether traders are buying puts or calls, though, it's getting more expensive to purchase premium on short-term options ahead of earnings, as volatility expectations rise. Specifically, SNAP's 30-day at-the-money implied volatility of 73.4% is in the 100th percentile of all readings taken since the stock began trading options in mid-March. Plus, SNAP's Schaeffer's Volatility Index (SVI) of 107% is at an all-time peak.

Looking at the charts, SNAP stock traded well above its $17 IPO on March 2, and hit a record high of $29.44 on its second day of trading. Since then the shares have been stuck below $23.75, home to Snap Inc's (NYSE:SNAP) pre-bear gap close in early March. However, the 10-day moving average has served as support in recent weeks, with SNAP shares last seen trading up 3.7% at $23.30.

snap stock daily price chart may 9

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