Friday, October 27, 2017

Not Another Snapchat Straddle! Pre-Earnings Vol Edition

*Oct 30, trade update: I closed this out < one trading day later for +31%*

First and foremost, some standard legalese "this isn't investment advice. Options involve risk and you're probably going to lose every penny you have in this trade and don't come whining to me if you blow it". That should hold up in court!

With that being said, I'm a sucker for buying volatility in Snapchat, as evidenced by my blog post from March here, and that paid out quite well. Fast forward to now, Snapchat earnings are due out "after market close" on Tuesday, November 7. A recent check of SNAP's earnings implied volatility points to yet another opportunity to get long volatility prior to the earnings release. Here's why:

1. I had to cough up a couple bucks more than I had wanted; however, the earnings straddle is currently marked at +/- 13.8%. This is right in line with the straddle at 13.9% going into its first earnings release and cheaper than the straddle going into the last earnings release which was priced at +/- 14.5%

2. I have no intentions of holding through the earnings announcement, but the earnings gaps alone make the straddle look cheap. The last earnings close-open gap was -12.9%, with the stock closing down -14.1% on the day. It's other earnings release, the company's first, the stock gapped down -22%.

3. Short interest is the highest its been since IPO, currently at 30% of the float. With only 10.5k calls in earnings opex OI, I wouldn't be surprised to see shorts flood in to buy "cheap" opex calls ahead of earnings to insure against any rip. TWTR, with a similar market cap and only 8% short interest, currently has 51k calls in OI for this week's earnings report, almost 5x SNAP's earnings opex call OI. Furthermore, TWTR has 44k puts in earnings opex OI whereas SNAP currently only has 7.3k. I would not be surprised to see both of these numbers start to increase in SNAP, presumably pressuring IV into the announcement.

4. There are 7.5 trading days until the SNAP earnings announcement, giving time for a move in the underlying. Between this past Monday to Wednesday, the stock had made a max realized move of -10.7%. That was in 3 trading days. This straddle provides more than double the time for a similar realized vol move to occur.

5. This straddle stands to gain on any increase in implied volatility and on any decent move in the underlying prior to the announcement. I would be surprised if the straddle "compressed", i.e. decreased in value prior to earnings based on historical earnings moves. Especially considering the runup in short interest in the name.

6. The Achilles heel of this trade is a change in the earnings date. Since it's already marked on the company's website, I think that's unlikely. Furthermore, a change in date may lead to an increase in volatility since an abrupt earnings date change isn't usually bullish.

That's my hot take on what could be a hot trade. If this thing blows up in your face and you lose your house, your wife and your dog, don't come after me. Caveat Emptor!