Sellers have hounded Lyft (NASDAQ:) shares from the get-go. Last yearâÂÂs post-IPO plunge was a disaster, and the bloodletting only stopped in October once the Street shaved 58% from its peak value. Were that the end of the Lyft stockâÂÂs story it would be a depressing tale of what might have been or, alternatively, a lesson on why all but gambling gunslingers should leave IPOs alone.
But thatâÂÂs not the end. In the latest chapter, Lyft shares have taken a turn for the better. So too has Uberà(NYSE:), suggesting traders are finally warming up to companies in the ride-hailing space after shunning them for many moons.
Lyft stock has rallied 28% off the lows, while UberâÂÂs shares are up an impressive 42%. Yet the true test will come in early February, when both competitors face the scrutiny of their next earnings release. Lyft has only had three quarterly reports since its IPO, and each has resulted in disappointment. If the Feb. 11 announcement sees strong buying afterward, it will further confirm the shifting sentiment seen since the beginning of 2020.
Understanding LyftâÂÂs Stock Chart
With only nine months of history to dissect, the use of a weekly chart is unnecessary. The daily provides all the visuals needed, and in greater detail at that. Since bottoming in October, Lyft has built a multi-month bottoming pattern in the form of an ascending triangle. The series of higher lows helps confirm the reversal in the balance of power from bears to bulls. The trendâÂÂs trajectory turned the 50-day and 20-day moving averages higher.
Source: The thinkorswimî platform from TD Ameritrade
ItâÂÂs worth noting this morningâÂÂs down open resulted in a test of both smoothing mechanisms. Thankfully, buyers swarmed to defend their newfound turf and keep the uptrend alive. Uber experienced an even more powerful intraday rebound echoing the bullishness surrounding the industry right now.
The upper end of the bottoming pattern shows stiff resistance at $50. Consider that the level that must be blasted through before Lyft can advance to the next stage of its nascent uptrend. While you could wait for confirmation before deploying bull trades, I think naked puts provide an interesting alternative if youâÂÂre willing to tap into the derivatives market.
Naked Puts
Naked puts offer a higher probability substitute for buying stock. Whereas a long stock position requires the underlying to rise in value before profiting, selling puts can yield gains even if the stock falls a modest amount.
One way to think about the naked put is you are getting paid for your willingness to buy stock at a discount. This creates a psychological win-win if used with companies you wanted to purchase anyways.
For example, instead of buying Lyft stock right now for $47.50, I can sell the March $42.50 put for around $1.45. If the stock sits above $42.50 at expiration, then the put will expire, and I will keep the $1.45 per share ($145 per contract) as profit. If the stock falls below $42.50, then IâÂÂll buy it for an effective purchase price of $42.05. ThatâÂÂs an 11.5% discount to its current value and might not be a bad entry price if you believe in the longer-term prospects for LYFT.
The Trade: Sell the March $42.50 puts for $1.45.
As of this writing, Tyler Craig didnâÂÂt hold a position in any of the aforementioned securities. For a free trial to the best trading community on the planet and TylerâÂÂs current home, !
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