I’ve been waiting for this trade to set up for ages! This stock has been one of my favorites based on fundamentals for a while now. It’s just so damn cheap! The technicals have finally lined up, and I’ve taken my first stab at it!
I finally took a position in my favorite tech stock on Monday! I thought you should know how my members get these types of alerts in real-time. Subscribers to Total Alpha get pre-alerts. 10 minutes before I make any trade, I’m telling my members about it. No one else in the industry does this, most twitter pumpers buy before alerting and sell into the sheep on illiquid penny stocks! I’m so committed to your development and best interest over mine, that I will spell out my trade idea before I enter the position, that’s how committed I am to your success.
On Monday, I finally took a position in SNAP! During the day, it was rumored that Elon Musk would finally come to an agreement for his acquisition of Twitter (TWTR) which he did. Clearly, Elon saw value in the social media company and felt that as an activist investor, he could make this platform even better. SNAP is another social media stock that I think is grossly undervalued and could also get bought out!
Fundamentals
Snap Inc. (SNAP) operates as a camera company in the United States and Internationally. The company offers Snapchat, a camera application that was created to help people communicate through short videos and images. Each of those short videos or images is called a Snap.
After a poor performance post IPO in 2017, where SNAP was just burning money for a few years, it became a turnaround story. In 2019 it began to accelerate its revenue growth, and this trend continued post-Covid, with year-on-year revenues growing quarter after quarter.
This turnaround growth was reflected in SNAP’s stock price. From COVID-19 lows of around $8, the stock was trading around $75 coming into the Q3 2021 earnings report, a price gain of over 900% during this time.
After a big earnings miss, SNAP gapped down. Then as most growth and tech stocks got the Kibosh, SNAP has stayed weak down over 55% from its 2021 highs. Before Elon began buying up TWTR stock, it too was down over 55% from its 2021 highs. When certain sectors are out of favor, that can be the best time to pick up high-quality, undervalued businesses.
I really think SNAP will reverse. It is not done! I think they will figure out the advertising, and it will be just fine!
SNAP is a big Metaverse play, and teenagers use it and love it. In fact, the younger folk use it more than Instagram in a lot of cases. Given the transition into AR and VR that we are seeing slowly taking shape, I believe a company like SNAP is poised to benefit, given that they have been a leader in Augmented Reality technology for a few years now.
Technicals
The 28.50 to 28 area is a MAJOR level of support. The last 2 times SNAP tested this support in Feb and March, the stock moved back towards $40. This is a great trade location and a good risk/reward trade for a stock that I think is significantly undervalued and could get bought out!
The Trade
Given how weak and volatile the market is at the moment I’ve decided to take a more conservative approach to trading SNAP. Instead of buying calls when the IV is high or get long the stock outright, I have sold a put spread in SNAP so that the higher-priced options might actually work in my favor.
I’ve sold the 28 puts and bought the 26 puts expiring May 6 at $0.44. SNAP doesn’t even need to move higher for my trade Idea to work, it can simply trade sideways. So long as SNAP holds above $28 on May 6, I will collect the full premium of $0.44. My maximum risk on this trade is $2- $0.44 which is $1.56. I have given up potential upside to have a risk-defined higher probability trade.
Key Takeaway
By selling a put spread, I am reducing the risk of buying calls outright and also increasing the probability that my trade idea will work. As with anything, the cost of this is giving up potential upside if SNAP decides to rocket higher.
