Unusual Options Activity: Would You Bet $1.6M on a Stock Down 60%?
Last week, Roblox (RBLX) fell below its IPO price for the first time.The popular video game went public in March of last year, and went on to double its share price just six months later. Since November, it’s been a different story… With help from the overall market weakness, shares have dropped 60% and now trade under its initial IPO. The chart looks a lot like other hyped-up tech stocks of the past year… The question now is, where’s the stock headed from here? Do we get a bounce, or is this falling knife set to plunge even further?
One way I track potential rebounds is with my Profit Radar.When stocks fall deep into the lagging quadrant, the red shaded candlesticks, it means we are getting closer to that inevitable bounce. This doesn’t mean Roblox would turn into a long-term buy right here, but it means there’s the potential to make some money on a quick move higher. So Roblox is trading in the buying range of my Profit Radar. Plus, the company has an earnings announcement scheduled in two weeks on February 15. Earnings always have the potential to move a stock by a large amount overnight. But, you know what really caught my attention on Roblox was the unusual options activity… This trader is not sitting on the fence about where the stock is headed next. They dove right in and made a big splash. And if they’re right, they could be looking at a massive payday.
An Unusual Options “Block” Trade
Last Friday, I spotted an unusual options trade on the stock with a $1.4 million bet.In a single block trade — meaning all contracts were purchased at one time — they bought the March 18, 2022 $60 call option for $6.60. With 2,200 contracts purchased, this is a large position looking for a short-term bounce. It looks like they’re simply betting on a big move from earnings, but they have two more weeks the stock can pop and deliver profits before they even hit that day. So they may not have to hold through the volatile event to get a big payday. Either way, it looks like this trader is confident the stock will move higher from here. I know, betting on a company that makes a single video game may not be your thing. It’s not really mine either. But when I’m trading options, I try not to focus on the company or what they do. After all, price is what drives our profits, so that’s all we really need to focus on. However, I am familiar with this game. My kids played Roblox for a number of years. Both have moved on now, but I know we spent money on the supposedly “free to play” game. This is a new trend that emerged over the past few years, where kids can play a game for free, but then willingly pay money to unlock new features. (Back in my day, you just had to play the game to unlock those features.) Similar to Facebook’s goal with the Metaverse, Roblox creates an online marketplace for kids to buy the latest gear and gadgets inside the game. No physical objects… It’s all virtual. But you have to spend real money to get these items. This gets around the patience of having to play for a long time, and lets kids (with their parents’ money) add the cool new features that all of their friends have. There’s something to this, that’s for sure. Roblox isn’t your ordinary video game maker. They are disrupting the industry. This trend is already underway, and I doubt we’ve seen the last of it. And right now seems like as good a time as any to bet on a bounce. Regards, Chad Shoop, CMT Editor, Quick Hit Profits
Chart of the Day:I’m Calling It, Risk Is Coming Back
If a $1.4 million bet on Roblox wasn’t enough to convince you there’s risk appetite in the market, take a look at this chart of the dollar.There’s a lot to talk about here, so I’ll try to get through it concisely as I can. One, the dollar RSI is at its most overbought since 2015. That comes along with a bearish divergence on the weekly timeframe. We’re seeing the same thing on the MACD, to a lesser extent. Two, in the past, the dollar has tended to perform well when markets go risk off. That would explain its outsized performance so far in 2022. From the lows in the second week of January, the dollar is up 3%. Sounds small, but it’s huge for an asset like the dollar. So, if we put these two ideas together, and we observe the trendline on the dollar, we have a fairly solid indicator of when risk could return to the market. If risk does return to the market at the same time the dollar breaks down from the white trendline on the right, that could be a signal of bullishness back on the rise. Grain-of-salt time: I am not a currency expert. I just like to chart whatever looks interesting, and draw my own conclusions. For what it’s worth, my money’s on the recent slump in the market not lasting much longer. Regards, Mike Merson Managing Editor, True Options Masters
Investing has consumed my life since college. While double majoring in finance and economics at the University of North Carolina at Greensboro, I founded the university’s economics club, joined the finance club and participated in the Chartered Financial Analyst research competition to represent our school.