New Trade Alert for SNAP (SNAP)
Buy SNAP January $10 Call @$4.00 or less
NDX Nasdaq 100 big boys of Tech continue to post new record highs after the full “V” recovery from the spring selloff.
SNAP has suffered, swooning to the $10 level in in May.
Bullish divergence with new low and now new highs in volatility is a positive sign for a price pop.
Social media stocks Facebook and Twitter surged after IPO’s only to slip slide before monetizing their members and taking off.
The initial objective is a halfway recovery rally back to the $15…then sets sights on $17 launch price.
The Options Way: Unlimited Upside Potential with Limited Risk.
A SNAP long call option can provide the staying power in a potentially larger trend extension. More importantly, the maximum risk is the premium paid.
One major advantage of using long options instead of buying or selling shares is putting up much less money to control 100 shares, that’s the power of leverage.
Choosing an option can sometimes be a daunting task with all of the choices and expiration months. Simply put, traders want to buy a high probability option that has enough time to be right.
The option strike price is the level at which you have the right to buy without any obligation to do so. In reality, you rarely convert the option into shares. Simply sell the option you bought to exit the trade for a gain or loss.
There are two rules options traders need to follow to be successful.
Rule One: Choose an option with 70%-plus probability. The Delta is a measurement of how well the option reacts to movement in the underlying security. It is also important to buy options that payoff from only a modest price move.
There is no need to ONLY make money on the all but infrequent long shot price explosions.
Good Options can profit from just modest directional moves.
Any trade has a fifty/fifty chance of success. Buying In The Money options increase that probability. That Delta also approximates the odds that the option will be In The Money at expiration.
Buying better options are more expensive, but they are worth it. The chances of success are mathematically superior to buying cheap, long shot Out Of The Money lottery tickets that rarely ever pay off.
With SNAP trading at $13.50, for example, an In The Money $10 strike option currently has $3.50 in real or intrinsic value. The remainder of any premium is the time value of the option.
Rule Two: Buy more time until expiration than you may need — time for the trade to develop. Time is an investor’s greatest asset when you have completely limited the exposure risks.
Traders often buy too little time for the trade to develop. Nothing is more frustrating than being right, but only after the option has expired premature to the market move.
Trade Setup: I recommend the SNAP January $10 Call at $4.00 or less.
SNAP has not traded below $10 ever.
An option play also has staying power with the ability to ride through Ups and Downs that would force most stock traders out of the position.
The option also behaves much like the underlying stock with much less money tied up in the investment. The Delta of this $10 strike is 83. That also approximates the probability that the option will be in the money at expiration.
The January option has seven months for bullish development.
The maximum loss is limited to the $400 or less paid per option contract with an exit stop loss at half the option premium to reduce dollar exposure. The upside, on the other hand, is unlimited.
The SNAP option trade break even is $14 at expiration ($10 strike plus $4.00 or less option premium). That is a dollar above the stock current price.
An attack on the $17 IPO price would put the option value at $7.00 to nearly double the original investment.