212.5% Bearish Trade ‘Cause UBER Can’t Make Money

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You know something’s not quite right when you go from the hottest IPO of the year to the cautionary tale of what not to do just a few months later.

Uber Technologies (UBER) is still one of the most disruptive companies to enter the market in years. Its ride-sharing business has changed so much in such a short amount of time, you can’t help but expect big things for it.

So, when the company went public in the first half of the year, investors were wild for it. You couldn’t avoid front-page stories about how big it was, how excited investors were to get in and why it could be the next Facebook or Apple.

Then, as you are likely aware, everything changed. They hype disappeared as this newly-public entity started reporting insanely bad earnings. The company has next to no path to profits in the short or medium term. It is fighting hundreds of simultaneous lawsuits over everything from sexual assaults to employee misconduct.

Now, to add to the problems, California passed a bill that would instantly turn the company’s drivers from independent contractors into employees, with all the benefits and minimum wages that go with that. This single piece of legislation promises to increase Uber’s – and its chief competitor Lyft’s – costs by 25% to 30%… right when the two are already struggling with terrible margins.

Of course, investors aren’t stupid… or at least, they don’t stay stupid for long. After initial optimism, you can almost see the minute investors changed their collective minds about the company’s future:

Screen Shot 2019-09-10 at 1.56.30 PM.png

The most recent earnings came out on August 8. You can see how investors reacted to its $4.72 per share loss during the quarter. It actually missed analyst expectations by a full $1.53 per share, an unheard-of miss, especially for such a newly-public name.

Now, the company does have some things going for it. Its first-to-market still has it leading Lyft in number of rides and market share. Now, with new legislation and these two company’s reach, they have fewer worries about additional competition. And it’s clear that they have completely dismantled taxis across both the United States and much of the world. So, there’s some economic moat.

But the pressing issue is how to proceed with a path to profits. And right now, there’s really no answer. The only way to increase margins would be to hike passenger rates or pay drivers less. With Lyft still competing for market share, those options are not really on the table. And depending on what happens with this new legislation, the opposite could be coming in terms of drivers’ pay.

Customers are already able to play one off the other for the best ride fares with a few button touches on their smartphones. So, Uber won’t be able to touch fares much with Lyft still in the market.

To make matters worse, if that’s possible, the investment community has rejected Uber so much that one out of every three shares trading hands right now are shorts. To put that in context, Tesla – one of the most shorted stocks in the market – sees 12% of its daily volume made up of shorts.

This could turn into a short squeeze, where those large number of shorts are forced to cover their position on any bump in Uber’s share price. That would force them to buy back their short position squeezing share prices higher.

But a far more likely scenario, considering the next potential catalyst for such a drastic move isn’t until its next earnings call in November, is a continuation of UBER’s decline.

A recent uptick over the last week gives us a great entry point to this kind of trade. One way to play it, of course, would be to join those shorting Uber’s shares. But the risk of a short squeeze makes that a rather risky position.

Instead, we turn to one of our favorite bearish strategies. Let’s get right into it…

A Strategy For Short Term Bears

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

The income from that second one helps offset the cost of the first, thereby reducing the amount at risk. In exchange for this cost reduction, the maximum profit potential of the trade is capped… but still often offers a larger return then risk.

You can see how this works here:


Source: The Options Industry Council

As you can see, for this play to reach profitability, shares of the underlying have to fall. But they don’t have to collapse completely. That makes this an ideal way to play UBER right now.

The company is going to continue to see downward pressure until it can at least prove to investors it has a plan to escape its dire financial situation.

Uber does have plenty of cash on hand, following its large IPO. But it is eating through that cash each and every day. It should last about three years if nothing else changes. So, a complete collapse isn’t likely. But a turnaround isn’t either in the short term.

Let’s look at a specific example to see how much a trader might be able to lock in using this strategy.

A Specific Trade On UBER

Right now, a trader could buy an October 18 $33 put for $1.64 per share and sell an October 18 $31 put for $1 per share for a cost of $0.64 per share. Since each contract is worth 100 shares of UBER, that’s a net debit of $64.

That’s the total amount he’d have at risk for the length of this trade, which is about five and a half weeks. The potential returns, however, are even better.

To find those, take the difference in strike prices ($33 – $31 = $2), and subtract that cost ($2 – $0.64 = $1.36). Again, on 100 shares of UBER, that works out to a potential gain of $136.

In other words, this trader is looking at a return of 212.5% on the amount he has at risk. For a stock that has already been deemed a dud, that’s a pretty sizable return.

To max that return out, shares would have to drop below $31. Now, that does mean they’d have to fall 7.8%. But considering that in just the month of August they crashed 22.7%, this play remains a real possibility.

It’s not possible, however, to know when Uber will turn itself around. But for the right here and the right now, this trade offers a short-term way to triple your money on this seriously bad stock.

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