Roku Inc (NASDAQ: ROKU ) has changed its regularly scheduled program from bearish to bullish according to one notorious short seller. But if you buying what they're selling to investors, a long call spread remains a great way to ensure any unwanted script changes in ROKU stock are well contained. Let me explain.
Citron Research, a fairly loud and outspoken short-seller in the bear community, has become a turncoat in ROKU stock and is now in the bull camp. The small firm's lead analyst, Andrew Left, was very much on-the-money previously when shares of Roku were nearing $50 and warned the stock was due for a tumble into the high $20s.
So, what has changed - other than this particular short sale paying off big time for Citron? According to the short seller, everything has changed in a matter of months. I'm not so sure how that's actually possible in just one quarter to be quite frank.
And as InvestorPlace's Luke Lango clearheadedly notes, even if Mr. Left is correct, there are still risks that could be potentially huge. The most challenging threat could come from tech giants like Apple Inc. (NASDAQ: AAPL ), Alphabet Inc (NASDAQ: GOOG , NASDAQ: GOOGL ) or Facebook, Inc. (NASDAQ: FB ), all of whom have "skin in the OTT content game."
Only time will tell us what awaits ROKU stock. But in the here and now, I am a fan of my Roku box after having initially jumped on the OTT (or over-the-top) bandwagon more than five years ago. I'm also a fan of ROKU stock, as the big picture still points to better days ahead on the price chart.
Roku Stock Daily Price Chart
Technically, the evidence on the ROKU stock chart points to higher prices following a stiff corrective move of nearly 51%. The pattern bottom - known as a Gartley - completed slightly deeper than I anticipated (point D) when discussing shares in late March. Nevertheless, it's imperative to remain open-minded and flexible in the face of imperfect information if we're going to consistently put our best foot forward with an occasional step backwards.
Bottom line, ROKU's marginally extended Gartley which completed at point DD could be a point of irritation after pounding the table for a bottom at point D. But since the longer and deeper wing looks a bit more symmetrical with the overall pattern and held the Fibonacci 76% level, and since shares are now moving higher within a fully developed uptrend, now is still a great time to be bullish on ROKU stock.
Roku Stock Bull Call Spread Strategy
Reviewing ROKU stock's options market, the Aug $41/$47 bull call vertical look like an attractive way to position within the new uptrend. Verticals like this one are a terrific way to both cut down options risks associated with the Greeks and limiting a position's dollar exposure to a known amount of capital. And if all goes well, while profits are capped if the position is left unadjusted, the returns can be very lucrative.
With shares at $37.46, this vertical is priced for $1.60 or just more than 4% of the risk associated with holding ROKU shares. The break-even on an expiration basis is $42.60. Above $47, the investor will capture $4.40 or a return of 275%.
The strike placement means the stock will need to reaffirm the uptrend if any profits are going to be achieved. But as our forecast for shares is for higher prices, that seems reasonable.
Investment accounts under Christopher Tyler's management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler's observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits .
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