Actions of Roku (NASDAQ:ROKU) seem to have finally found some ground. ROKU shares have seen some serious sell off in recent months. The price of ROKU has effectively halved since reaching historic highs in late July.
Certainly, part of the sale was justified given the unrealistic move to the upside. But the sale has now gone too far, too fast. Expect ROKU’s stock to rebound over the next several weeks.
The current price per profit (P / E) is still a very rich 110.66x. It’s important to remember, however, that this is just at an all-time low.
ROKU has absolutely crushed profits over the past four quarters, but ROKU’s stock is significantly lower. The combination of continued earnings reports and significantly lower stock prices make valuations increasingly attractive.
ROKU’s stock also looks technically attractive. Stocks actually had a positive day on Friday, as the overall market suffered the worst Black Friday loss in years. This followed a key turnaround day on Thursday. Roku opened lower on Thursday and to newer recent lows to reverse the price and close higher in the day. This type of price action indicates that sellers are sold out and buyers have taken control. This is an even stronger signal given the size of the previous sale.
The 9-day Relative Strength Index (RSI) hit the most oversold readings in the past year, but eventually firmed and rose. Bollinger Percent B dipped into negative territory but turned positive again. Moving Average Convergence / Divergence (MACD) has reached an extreme level but has also improved. ROKU is trading at a significant discount from the widely followed 20 day moving average.
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The last time all of these indicators lined up the same, marked a significant mid-term low in the stock (highlighted in the chart).
Expect the same in the coming weeks. A return to the 20 day moving average in the $ 270 area would be the initial price target. The secondary price target would be the primary resistance level at $ 300.
Buying ROKU shares is expensive and risky, even after the big drop. Fortunately, the options market offers a way to take a cautiously bullish position in a cheaper and less risky manner.
Implied volatility (IV) has increased over the past two weeks from 46 to 62. This means that option prices are more expensive. The sharp increase in prices favors option writing strategies when building new trades. A bearish selling credit spread has a probabilistic meaning. It positions the investor to be a buyer of ROKU shares on even greater weakness while collecting rich options premiums up front – all in a risk-defined way.
How to trade ROKU stocks
Sell the January sales spread of $ 195 / $ 200 for net credit of $ 1.10 or better.
The maximum gain on the trade is $ 110 per spread. The maximum risk is $ 390 per spread. The risk return is 28.2% for 50 days. The short strike price of $ 200 offers a nearly 15% cushion to the closing price of $ 227.61 of ROKU stock.
The spread expires well before the next results publication scheduled for early February. This eliminates any risk associated with profit.
At the date of publication, Tim Biggam did not hold (directly or indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to the publication guidelines of InvestorPlace.com.
Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, 4 years as Chief Options Strategist at ThinkorSwim and 3 years as a Market Maker for First Options in Chicago. Tim has appeared on PBS and the Nightly Business Report, while maintaining a weekly appearance on Bloomberg TV and CBOE-TV to discuss everything from volatility to LEAPs. Tim has also been invited to recurring appearances on CNBC’s Volatility Playbook.