Last week, despite a large market decline on Monday, the major indices took a baby step forward. The S&P 500 gained 0.51%, the Dow rose 0.62%, and the Nasdaq eked out 0.02%.
The advance came despite ongoing uncertainties around Chinese property developer Evergrande and the seemingly hawkish message from the Fed announcement. Now the focus has shifted to Washington, D.C.’s finest and the decision around the debt ceiling and infrastructure. Add a sprinkle of Chinese power concerns and there seems to be just enough worry to keep investors on their toes.
Cabot Profit Booster 194
Last week, despite a large market decline on Monday, the major indices took a baby step forward. The S&P 500 gained 0.51%, the Dow rose 0.62%, and the Nasdaq eked out 0.02%.
The advance came despite ongoing uncertainties around Chinese property developer Evergrande and the seemingly hawkish message from the Fed announcement. Now the focus has shifted to Washington, D.C.’s finest and the decision around the debt ceiling and infrastructure. Add a sprinkle of Chinese power concerns and there seems to be just enough worry to keep investors on their toes.
As I asked last week, will we see further declines? And as I appropriately responded, that’s anyone’s guess. However, because of the violent market rotations, this week I am again going to play it defensively by selling in-the-money calls.
This week’s pick is social media platform Snap Inc. (SNAP).
The Stock – Snap Inc. (SNAP)
Why the Strength
Social media platforms flourished during the pandemic, but not all of them kept audiences engaged during this year’s reopening. Snap is a high-profile exception, as its younger user base still uses Snap to watch videos, play games and communicate with friends via its camera platform to create “snaps.”
Snap’s user engagement is shown by its daily active user growth, which increased 22% last year to 265 million and rose 23% in Q2 from a year ago, to 293 million, its fastest user (and revenue) growth in four years despite the world turning right side up. But this isn’t just an eyeballs-type story—sales more than doubled in the second quarter and were 28% higher than the previous quarter as Snap continues to boost its revenue-per-user figure, which has lots of upside compared to other big social media peers.
Analysts expect the firm’s top line to rise a mouth-watering 68% for the full year, while management forecasts sales to increase at 50%-plus rates in the next few years, led by Snap’s growing engagement across all its segments, including games. (Snap has reached over 200 million players for its games and mini-apps alone and has a multi-year, exclusive partnership with social game developer Zynga.)
Snap also recently rolled out the next generation of its popular Scan to Snap camera tool, which allows users to turn the camera into a search engine by pointing it at an object they want to know more about (while making it easier for businesses and developers to find the right lens).
Snap also continues to expand its partnerships with major companies like Disney and Google, with its Camera Kit allowing users to access exclusive augmented reality lenses with Disney characters, while working with the latter to expand its lens offerings to users in India.
All in all, the firm seems poised for years of rapid and reliable growth.
Technical Analysis
After SNAP’s huge-volume breakout last October (up 28% on 13 times average volume!), shares ran up an additional 75% before hitting resistance around 70 in February. That began what basically morphed into a seven-month rest—shares fell below 50 in the spring and gapped to new highs near 80 in July, but as of early last week, the stock was back to 70.
However, it looks ready to get moving: The past few weeks have shown relatively tight trading, and SNAP did move to new highs on Friday before pulling in with growth stocks today. We’re fine entering around here with a stop near the recent lows. Stop—69
The Covered Call Trade
Buy Snap Inc. (SNAP) Stock at 76.50, Sell to Open October 75 Strike Calls (exp. 10/15) for $3.80, or a Net Price of 72.70 or less.
Static Return: $230 per covered call (3.16%)
Breakeven: 72.70
Covered Call Return (if assigned): $230 per covered call (3.16%)
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 72.70 or less. (In this case 76.50 minus 3.80 = 72.70. Or another example is you could pay 80 for the stock and sell the call for 7.30, which also equals 72.70.)
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.
| Stock Name and Symbol | Price Bought | Current Stock Price | Stop | Option - Price of Call Sold | Current Option Price |
| Sonos (SONO) | 39.35 | 34.80 | 34.0 | October 40 -- $2.10 | $0.10 |
| Ternium (TX) | 53.45 | 44.00 | 46.5 | October 55 -- $2.05 | $0.10 |
| PureStorage (PSTG) | 26.65 | 26.50 | 22.5 | October 27 -- $1.00 | $0.70 |
| Cloudflare (NET) | 129.00 | 116.00 | 108.0 | October 126 -- $7.70 | $1.50 |
The next Cabot Profit Booster issue will be published on October 5, 2021.
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