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UBER: Betting on a Big Move
08/10/2020 9:35 am EST
Jay Soloff presents an interesting volatility trade in Uber.
With all the hoopla over electric vehicles this year, it seems like investors have nearly forgotten about the ridesharing business. There was a time where you couldn’t open up a financial publication without seeing something about Uber (UBER) or Lyft (LYFT).
Lately, however, ridesharing has taken a backseat—no pun intended—to the rides themselves. Investors have been obsessed with everything related to electric vehicles. Yet, with UBER earnings coming out Thursday after the close, investors' focus may return to the ride-sharing industry, at least temporarily.
The thing with ridesharing is that it has been basically non-existent (at least in the United States) with the pandemic raging onward. Not only are many more people working remotely (from home), but even those commuting aren't likely to use public or shared transportation. From that perspective, it would be easy to assume that UBER and LYFT are likely to post nauseating earnings this quarter.
On the other hand, at least in the case of UBER, the company has gone all in on food delivery. UBER already had the Uber Eats food delivery service, but it has since purchased Postmates to bolster the company’s market reach. Between the two, UBER now has about 37% market share. And let's not forget, as much as the pandemic has hurt ridesharing, it has boosted food delivery services by an exponential amount.
So, what should we expect for UBER's earnings? Will we see a bloodbath due to a lack of riders? Or, is food delivery going to bring the company out of the morass?
Here’s the thing, with options trading, you don’t have to choose a side (or a direction). In fact, that’s exactly what a very well-capitalized trader just did in UBER options.
This trader seems to have purchased 10,000 at-the-money straddles expiring in September. A straddle is buying both the put and the call at the same time (and at-the-money means it was the nearest strike to the current stock price). In this case, the September 32 straddle was bought with the stock at $32.35.
The cost of the straddle (adding the call and put premiums together) was $5.26 (or $5.2 million total). That price is what the stock has to move to—in either direction—for the trade to make money (see chart below). Now, $5.26 may seem like a lot for a $32 stock (it equates to a 16% move), but this is a September straddle with six weeks until expiration, so there is a lot of Theta (time value).
In other words, someone with a lot of trading capital thinks UBER is going to be moving quite a bit in the next several weeks. The catalyst could be earnings, but it doesn't have to be. Moreover, the trader isn't trying to guess the direction, just future volatility.
There is a lot of sense to this. First, the spike in Covid-19 cases is a type of sword of Damocles hanging over markets. There is a real chance of a market collapse that will capsize all boats. There is also a chance of normalization that would hurt firms that have prospered from food delivery in the process. Finally, there are earnings that could go either way. This trader is making a strong bet on some news that will cause this stock to move significantly.
Straddles can be expensive, so this is not a trade to enter into lightly. However, UBER is likely to move at least a few dollars either direction by expiration, so the chances of a total loss of capital are low.
It is also a solid lesson in the value of options. You can trade an option on a stock or any underlying market that faces an earnings reports or a fundamental factor that could cause a major move, in either direction. If you are convinced that the market is facing a major either/or move based on an earnings report or economic indicator, a long straddle is a great option to exploit a move in either direction.
Jay Soloff is the Options Portfolio Manager at Investors Alley. He is the editor for Options, an investment advisory bringing you professional options trading strategies, with all the bells and whistles of Wall Street, but simplified so all you have to do is enter the trades with your broker. Click here for your copy of the Beginner’s Options Guide before it’s no longer free.
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