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Uber And Its Disappointing Debut Sets Up a Trade In Its Rival

Uber And Its Disappointing Debut Sets Up a Trade In Its Rival

Uber finally went public and the deal which had been expected to raise $120 billion for the ride hailing service had an auspicious first day of trading. As Bloomberg reported,

“It was to usher in nothing less than a new era for Wall Street. UFAANG.

That ungainly acronym, envisioned by some at Morgan Stanley as the hype grew over Uber Technologies Inc., put the ride-hailing company in the same league as the titans of tech: Facebook, Amazon, Apple, Netflix and Google.

But by Friday’s closing bell, the most talked-about start-up of the decade and the biggest initial public offering of the year suddenly qualified for a different club — of losers.

Done in by a broad stock market selloff and a weak earnings report posted by its primary rival, Uber plunged immediately at the opening of trading, falling as much as 8.8% from its IPO price of $45 per share, a level that was already at the low end of bankers’ expectations. The stock closed at $41.57, and Uber joined a small group of major IPOs that ended their first day down.

Day One doesn’t necessarily determine the fate of a stock, of course. But Uber’s rough opening startled investors counting on a more jubilant debut from Silicon Valley’s quintessential unicorn. Many venture capitalists who had piled into the company were saddled with losses as the market capitalization shrank to $69.7 billion.

It all cast a pall on 2019’s prospects as the hottest year for tech listings this decade — and potentially on the future of the ride-hailing industry. Lyft Inc. followed its bigger competitor to end Friday down 7.5%, almost $21 below where it sold the stock just six weeks ago.

A Morgan Stanley memorandum to a group of wealth managers touted Uber’s “massive, leading global platform” and other attributes and predicted the acronym for the best-performing tech stocks would gain a U, according to documents obtained by Bloomberg. (The documents used an old version, FANG, without the A for iPhone maker Apple.) A spokesman for Morgan Stanley’s wealth arm declined to comment.

The bank led the listing with Goldman Sachs Group Inc. and Bank of America Corp.

Uber could certainly still join the celebrated group of popular tech stocks, even with a tough ride out of the gate. Dara Khosrowshahi, Uber’s chief executive officer, said in an interview on the floor of the New York Stock Exchange that trade tensions between the U.S. and China played a role in the weak performance. President Donald Trump had moved overnight to slap fresh tariffs on Chinese goods.

“You can’t pick when you go public,” Khosrowshahi said.

Still, Uber shares extended losses into the close, even as U.S. equities stabilized on renewed optimism that an all-out trade war can be averted.

It took more than two hours for the stock to start trading after Uber executives and drivers congregated at the exchange for the bell-ringing ceremony. The shares debuted at $42, well below the IPO price. A tense wait for those on the trading floor turned into a jittery start for the newly public company, which touched its intraday high and low prices within 35 minutes of opening.

Uber may have been weighed down by Lyft (Nasdaq: LYFT) which fell sharply since its IPO.

LYFT daily chart

While options are not available on Uber, they are on Lyft and that could be the best way to trade the industry.

A Trading Strategy To Benefit From Weakness

A price decline often results in higher than average options premiums. That means option buyers will be forced to pay higher than average prices for trades, But, sellers could benefit from the higher premiums.

In this case, with a bearish outlook for the short term, a call option should be sold. The call should decline in value if the stock declines and sellers of calls benefit from this decline.

Selling options can involve a great deal of risk. A spread options strategy can be used to limit the potential risk of the trade.

One strategy that traders can consider is the bear call spread. This is a trade that 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. The call is sold to limit the risk of the trade. So, this strategy will always generate a credit when it is opened and will always have limited risk.

The risk profile of this trading strategy is summarized in the diagram below which shows the limited risk and reward.

bear call spread

Source: The Options Industry Council

While risks and rewards are limited, this strategy will allow traders to generate potential gains in a stock they might otherwise find too risky to trade. Many individuals ignore bearish strategies because of the risks.

You’ll know the maximum potential gain with this strategy as soon as it’s opened. It 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 and is also known.

Every day, we scan the markets looking for trades that carry low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.

When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.

A Bear Call Spread in LYFT

For LYFT, we could sell a May 17 $51 call for about $2.10 and buy a May 17 $53 call for about $1.20. This trade generates a credit of $0.90, which is the difference in the amount of premium for the call that is sold and the call.

Remember that each contract covers 100 shares, opening this position results in immediate income of $90. The credit received when the trade is opened, $90 in this case, is also the maximum potential profit on the trade.

The maximum risk on the trade is about $110. The risk can be found by subtracting the difference in the strike prices ($200 or $2.00 times 100 since each contract covers 100 shares) and then subtracting the premium received ($90).

This trade offers a potential return of about 81% of the amount risked for a holding period that is relatively brief. This is a significant return on the amount of money at risk. This trade delivers the maximum gain if LYFT is below $51 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 $110 for this trade in LYFT.