United States Supreme Court Justice Potter Stewart famously set his standard for obscenity in 1964 with the phrase "I know it when I see it." In a similar fashion, the recent 100% rally in Longfin Corp (NASDAQ: LFIN ) over the past 10 trading days has reached my threshold for an obscene rally. LFIN has become the latest poster child for the out-of-control Crypto craze. The time has come to take a prudent short position in Longfin stock.
An attempt to justify the stock price of LFIN anywhere near current levels on a fundamental basis is simply ludicrous. The announcement on Dec. 18 that Longfin was acquiring cryptocurrency company Ziddu.com was the impetus behind the insanity. The market cap is fast approaching $5 billion for a company that had last reported sales of $9.27 million for Q2 of 2017.
The company came public last December at $5 per share and quickly traded up to $142.82 intra-day before crashing back to $41 only three days later.
Longfin stock is simply a short squeeze of epic proportions. Look for a brutal sell off in the shares over the coming weeks.
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A look at the chart shows that LFIN is now back near the all time closing high of $72.38. Longfin has rallied 9 out of the last 10 days with the overall gain in that time period exceeding 100%.
Overbought is an understatement, with LFIN trading at over 90 on a 9-day RSI basis. Given the magnitude of the rally, the impending reversal in Longfin stock will most likely be swift and sudden.
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Longfin stock has a very small float, which makes shares of LFIN virtually impossible to borrow-and therefore very difficult and dangerous to short outright. This sets up ideally for the short squeeze scenario just witnessed. It also sets up ideally for a defined risk option strategy that will profit from a return to sanity in Longfin stock. Since the stock is nearly impossible to borrow, the implied volatility on the puts is at at a huge premium to the calls. This favors option spread strategies in structuring a bearish opinion.
Longfin Stock Trade Idea
Buy LFIN May $55 puts and sell LFIN Mat $45 puts for a $4.50 net debit.
Maximum risk on the trade is $450 per spread. Ideally LFIN closes below $45 at may expiration to realize the maximum gain of $550 per spread (122%).
Tim may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his option-based strategies can go to https://marketfy.com/item/options-and-volatility.
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