Social Media Is Almost Always Volatile
One of the best industry groups for traders to follow in the past few years has been the social media group. Here, companies are competing for advertising dollars and the giants in the online world are raking in a majority of that limited revenue.
That means, in the hypercompetitive world of Silicon Valley, that the remaining companies are setting their sights on taking business from competitors. Among the companies that have been hit hardest by this trend is Snap Inc. (NYSE: SNAP).
Some analysts believe Facebook has been a leader in this trend. Late last year, Facebook reported that Instagram Stories, “which many have said is a thinly veiled Snapchat rip-off, now has more than 300 million daily active users compared to only 173 daily active users for Snapchat’s app.”
The Latest Challenges to Snap
Now comes news that Twitter Inc. is working on a new Snapchat style feature that makes it easier to post videos on the social-media company’s app, according to people familiar with the matter, aiming to attract more users and cement a nascent turnaround.
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Twitter reportedly has a working demo of the camera-centered product, according to people who have seen it, but the design hasn’t been finalized, nor has the timing of its debut.
News reports indicated “the tool could change significantly over the next several months, they said, asking not to be identified because the product hasn’t been publicly disclosed. The goal of the new feature is to entice people to share video clips of what’s happening around them.”
But, this was just one piece of bad news facing Snap this week.
One of Snap CEO Evan Spiegel’s top lieutenants Tom Conrad will leave Snapchat, and the whole tech industry, in March. Coming roughly two years after he joined the company as VP of Product, a source tipped off TechCrunch to Conrad’s impending departure, which Snap now confirms to us. Snap’s director of growth Jacob Andreou who reported to Conrad will step into his role at an executive level, though no official new title has been assigned to him.
As one source noted, Conrad isn’t the only top manager to leave in recent months and the flight of top executives is just one problem the company is facing, “Share prices are down, user growth has slowed to a crawl in the face of Instagram’s competition and it’s missing revenue targets.”
TechCrunch reports that sources “increasingly indicate Snap is a tough place to work, ruled by CEO Evan Spiegel with an iron fist, and run by his inner circle even when they lack experience. SVP of Engineering Tim Sehn, early employee Chloe Drimal, VP of HR and Legal Robyn Thomas and VP of Securities and Facilities Martin Lev have all parted ways with Snap since July.”
The Stock Shows the Strains
Not surprisingly for a company where reports indicate pressures are building from the outside as well as from the inside, the stock price is under pressure.
Since its initial public offering, or IPO, the stock has been in a down trend. The company has repeatedly missed earnings estimates and is expected to deliver its next report on February 6. That could spark another sell off in the stock, or at the least renewed volatility.
To benefit from the expected weakness in the stock, an investor could buy put options. But, high prices on put options suggests an alternative trading strategy. The option premium is high because the expected volatility of the stock is high. Options that are based on selling an option can benefit from high volatility.
In this case, with a bearish outlook, a call option should be sold.
Selling options can involve a great deal of risk. A credit spread option strategy can be used to limit the potential risk of the trade.
One strategy that is important to consider is the bear call spread. This trade uses two calls with the same expiration date but different exercise prices. Traders buy one call and sell another call. The exercise price of the call you sell will be below the exercise price of the long call, so this strategy will always generate a credit when it is opened.
The risk profile of this trading strategy is summarized in the diagram below.
Source: The Options Industry Council
The trade has limited up side potential and limited risk. But, this strategy will allow traders to generate potential gains in a stock they might otherwise find too risky to trade.
The maximum potential gain with this strategy is equal to the amount of premium received when the trade is opened. The maximum loss is equal to the difference between the exercise price of the options contracts less the premium received.
A Bear Call Spread in SNAP
For SNAP, we have a number of options available. Short term options allow us to trade frequently and potentially our account size quickly. Short term trades also reduce risk to some degree since there is less time for a news event to surprise traders.
In this case, we could sell a February 9 $15 call for about $0.60 and buy a February 9 $16.50 call for about $0.30. This trade generates a credit of $0.30, which is the difference in the amount of premium for the call that is sold and the call.
Since each contract covers 100 shares, opening this position results in immediate income of $30. The credit received when the trade is opened, $30 in this case, is also the maximum potential profit on the trade.
The maximum risk on the trade is about $120. The risk is found by subtracting the difference in the strike prices ($150 or $1.50 times 100 since each contract covers 100 shares) and then subtracting the premium received ($30).
This trade offers a potential return of about 25% of the amount risked for a holding period that is about two months. This is a significant return on the amount of money at risk. This trade delivers the maximum gain if SNAP is below $15 when the options expire, a likely event given the stock’s trend.
Call spreads can be used to generate high returns on small amounts of capital several times a year, offering larger percentage gains for small investors willing to accept the risks of this strategy. Those risks, in dollar terms, are relatively small, about $120 for this trade in SNAP.
These are the type of trading strategies that are explained and used in TradingTips.com’s Options Insider service. To learn more about how to trade options can be used to meet your goals, click here for details on Options Insider.