SNAP Options Traders Expect Another Earnings Rally

SNAP stock has struggled since the company's last earnings release

Managing Editor
Apr 30, 2018 at 2:06 PM
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Social media giant and Snapchat parent Snap Inc (NYSE:SNAP) is slated to report its first-quarter earnings after the close tomorrow. Ahead of this event, SNAP made Schaeffer's Senior Quantitative Analyst Rocky White's list of 20 stocks that saw the heaviest weekly options volume during the past 10 trading days, which can be seen below. (New additions to the list have been highlighted in yellow.)

MAO Chart April 30

Snap stock is down 0.1% to trade at $14.20, even after Deutsche Bank raised its price-target to $15 from $13. Shares of the Snapchat parent have struggled since a February bull gap, embarking on a series of lower highs, but seem to have found support in the $14 area -- where they were trading before the gap.

SNAP stock chart

Looking at SNAP's earnings history, the company has only reported a total of four times, with the stock averaging a 24.4% swing in either direction the day after reporting. Though the first three earnings reactions were negative, last quarter, Snap stock managed to gap a whopping 47.6% higher. This time around, the options market is pricing in a 25.2% next-day move, per at-the-money implied volatility data.

Digging deeper, the stock's now-expired weekly 4/27 16-strike call saw the largest increase in open interest over the past 10 days, with more than 22,600 contracts added. Among options that are still trading, the weekly 5/4 13.50-strike put and 15.50-strike call both saw roughly 15,000 contracts opened. According to Trade-Alert, speculators were betting bullishly, initiating a version of the synthetic long stock position by selling to open the puts and buying to open the calls. The best-case scenario is for SNAP stock to finish the week north of $15.50, putting the calls in the money and leaving the puts to expire worthless.

Bullish betting has been par for the course for SNAP options traders lately. Data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows the security with a 10-day call/put volume ratio of 2.96, ranking in the 99th percentile of its annual range. This suggests calls have been purchased over puts at a faster-than-usual clip over the past two weeks.

As such, short-term puts are pricing in unusually low volatility expectations relative to their call counterparts ahead of the company's upcoming earnings report. SNAP's 30-day implied volatility skew of negative 4.9% ranks in the bottom of its annual range.

Meanwhile, short sellers have been piling on ahead of earnings, as these bearish bets represent nearly 15% of the equity's total available float. Against this backdrop, it's possible that some of the recent call buying -- particularly at out-of-the-money strikes -- could be attributable to shorts hedging their SNAP bets with options.

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