Despite some optimism early last week, the sellers obliterated that hope Wednesday through Friday, as the indexes fell sharply, pushing the S&P 500 into an official bear market (down 20% from its highs).

Cabot Profit Booster Issue: May 24, 2022

Market Overview
Despite some optimism early last week, the sellers obliterated that hope Wednesday through Friday, as the indexes fell sharply, pushing the S&P 500 into an official bear market (down 20% from its highs).

Awful earnings reports from leading retailers Walmart (WMT) and Target (TGT), along with disappointing economic data and hawkish speeches from the Federal Reserve sparked worries of an “inevitable” recession, which weighed on stocks as the S&P 500 fell 3.1%, the Dow declined by 2.9%, and the Nasdaq lost another 3.8%.

And while Monday the market looked better, this morning the indexes are again under pressure. Because of this wild volatility, this week we are again going to execute a defensive covered call in a recent earnings winner.

The Stock – Bumble (BMBL)
Why the Strength
One type of theme we like to look for are “follow-on” opportunities, which are newer names that pop up in a growth industry with something new and different—and become the new leaders. In that sense, we think Bumble could be “the next” Match.com or Tinder, leading the online dating sector in the years ahead; indeed, the firm was started by the former VP of Marketing for Tinder (and is just 32 years old, by the way). But this isn’t just a Tinder copycat.

The big difference with Bumble is that women have to make the first move by initiating a chat, giving them more power to command the conversation, picking and choosing potential matches. (Lots of guys like it, too, taking the pressure off to always go first.) Another difference is Bumble’s policy on “ghosting,” which is when someone abruptly cuts off a conversation (usually in place of actually saying they’re not interested)—basically, a new chat must be responded to within 24 hours or else it disappears. Throw in fewer spam bots than most competitors, and Bumble is carving out a name for itself in the matchmaking industry, leading to consistent growth and now profits, too—in Q1, sales rose 24%, earnings of 13 cents crushed estimates by 17 cents and (most important) user growth on Bumble rose 8% sequentially and 31% from the year before. (Revenue per user was also up 5% from the year before.)

The company also operates an older app called Badoo, which is focused overseas, though that’s having a tough time right now (the Ukraine conflict is hurting subscriber totals); its namesake app makes up three quarters of revenue and is the growth engine here. In total, revenues should be up 20%-plus this year, the bottom line should be in the black and most analysts see user growth remaining strong.

Technical Analysis
BMBL came public with a lot of fanfare more than a year ago, and the result was a toboggan slide from the get-go, falling from around 80 to a low of 16 in March. However, while there’s clearly more work to do, the stock now has 11 weeks of positive relative strength and has found big-volume buying on each of the past two quarterly reports (one in early March, the other two weeks ago). It’s not for the faint of heart, but a nibble here or on dips with a loose stop seems like a decent bet. Stop — 21.5

The Covered Call Trade
Buy Bumble (BMBL) Stock at 26.5, Sell to Open June 25 Strike Calls (exp. 6/17) for $2.75, or a Net Price of 23.75 or less

Static Return: $125 per covered call (5.26%)

Breakeven: 23.75

Covered Call Return (if assigned): $125 per covered call (5.26%)

Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.

However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or less. (In this case 26.5 minus 2.75 = 23.75. Or another example is you could pay 26 for the stock and sell the call for 2.25, which also equals 23.75)

For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …

Open Positions
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.

The next Cabot Profit Booster issue will be published on June 1, 2022.

Analyst Bio

Jacob Mintz

Jacob Mintz is a professional options trader and editor of Cabot Options Trader. Using his proprietary options scans, Jacob creates and manages positions in equities based on unusual option activity and risk/reward.

Jacob developed his proprietary system during his years as an options market maker on the floor of the Chicago Board of Options Exchange, where he ran several trading crowds for nearly 10 years.

After a successful career on the trading floor Jacob was tasked with setting up a trading desk at a top-tier options trading company, trading against the most sophisticated hedge funds and institutions in the world.

Today Jacob trades for himself, coaches and teaches about options trading, and runs our Cabot Options Trader, Cabot Options Trader Pro and Cabot Profit Booster advisories. Jacob lives in North Carolina with his wife and two kids who keep him very busy with their sports and social calendars.