A Second Chance to Play UBER’s IPO

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Today is a big day for this year’s hottest IPO, Uber Technologies (UBER). The post-IPO quiet period ended. Meaning analysts can finally have their say about the future of the company. And they seem to be all of one mind.

As of this morning, 21 analysts marked UBER as a “buy,” 5 as a “hold,” and zero as a “sell.” That speaks volumes about what the big banks expect from UBER over the next few years. But it clearly isn’t yet impacting what the actual investment community expects.

Shares of UBER are up on the news… about 2% as I write. But that is just as likely the result of today’s large overall market rebound.

Since its IPO at the beginning of May, shares have been trying to crawl back from that first weekend freefall. At $42 per share, it is still flat to down from its IPO a full month later.

Now, trying to trade a stock right when it IPOs is a crapshoot. No one can accurately predict just how successful or poorly shares move when they first begin trading. That’s one reason why options aren’t even traded for the first week of a stock’s IPO. But here we are, a month later. What’s going on?

To try and figure out which direction a stock like UBER is headed at this point in its life, we need to look at two things. First, as those IPO traders start to exit the stock, who’s buying. By the sound of these analysts releasing full-throated “buys” today, I think it would be reasonable to assume institutional money is either getting in or building positions. But what about the rest of the investment community?

With so much ugliness in the economic picture – falling interest rates, escalation in the trade wars and productivity declines – the type of stocks the average investor is looking for changes. Unfortunately for UBER, it isn’t the right kind.

Along with buy and sell signals, or lack thereof, analysts also are painting a picture of how long the company will remain unprofitable. This is the second thing to look for when deciding on the direction of a post-IPO stock… the underlying financials.

As the early IPO gamblers leave the stock, others are now considering with a bit more interest how the underlying business is performing… and where it will head.

UBER just released its first quarterly numbers since its listing, and they were ugly. Sure, revenue grew 20%. But that was the lowest growth in company history. More importantly, the company lost around $1 billion in the 90-day period. That’s an enormous amount of money.

So, the question that all investors are really asking about UBER is: When will it become profitable?

According to the analysts and people inside the company, it could be several years away, 2022 at the earliest. If the market remains as shaky as it has been, with 800-point weekly swings, who do you think would really want to hunker down and wait for profitability that long?

That doesn’t mean anyone should go out and short shares of UBER. But it might not be the best long-term buy right now either. It will stay volatile for a while. But here, we’re in the business of making money in the short term. Is there a way to play UBER over the next few months?

I’d argue that today’s analyst bonanza gives smart traders a second chance to play the disappointing UBER IPO. You see, prior to its trading launch, the financial media and corporate backers were screaming about how amazing its shares were going to do as soon as it IPOed. But, when it finally did, investors themselves weren’t convinced.

When you have every single analyst on day one signal either a strong buy or at least a stable hold, you know where they’d like the stock to go. But investors already made it clear they aren’t following Wall Street’s lead on UBER.

This latest attempt to pump up UBER’s stock should end – at least in the short term – the same way as the last one. A second dip in share price is a real possibility. And fortunately for us, there’s a perfect way to play it…

A Strategy For Short Term Bears

A bear put spread is a type of trading strategy that involves buying one put option with a strike price near the current price of the underlying stock and selling a second one with a lower strike.

The sold put produces a small income that helps offset the cost of the bought one. This results in a lower net debit to the trader’s account, but gives up some upside potential. Meaning, both the amount at risk is lowered and capped, but so is the maximum profit potential.

UBER might not be the great company its analysts and institutional pumpers seem to think it is. But it also isn’t a terrible one either. It has the largest footprint in the emerging ride-share market. It is expanding greatly into its Uber Eats program and eventually automation. So, shares aren’t likely to crash from here. But they should dip a bit in the short term.

That makes it the perfect target for this kind of strategy. You can see how it works here:


Source: The Options Industry Council

This is a calculated trade on the company’s near-term price movement. So, even if UBER becomes the behemoth Wall Street predicts, this trade could still work out. Of course, it would only work if we use the right put options.

Let’s look at a specific trade for UBER…

A Specific Bear Put Spread on UBER

Right now, a trader could buy a July 19 $42 put on UBER for $2.65 per share and sell a July 19 $37 put for $0.90 per share for a net debit of $1.75 per share. On 100 shares of UBER, that’s a total entry cost of $175.

That’s the most this trade could possibly lose. If those analysts are right immediately and investors go along with it, shares could continue climbing. That would result in a loss of that $175. But if a repeat of last month’s post-IPO performance occurs, this trade would do better than good.

To find out just how much the trader stands to make on a share price dip, take the difference in strike prices ($42 – $37 = $5), and subtract the entry cost ($5 – $1.75 = $3.25). On 100 shares, that’s a total potential return of $325.

That means that if shares do dip from here, this trade would result in a 186% return on the amount at risk. And it’d pay that if shares drop just $5 from here. It wouldn’t even have to fall as far as it did last time for this full return.

No matter what your opinion on UBER is as a company or a stock, a near-term correction after its creeping return to its IPO price is likely. And this trade is the perfect way to play it.

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