Turn back time on Slack ($WORK) (April 15, 2020)
WORK
I want to talk about Slack ( NYSE: WORK ) here today, actually, I want to talk about the trade and here’s why: This is a stock, it is one of the COVID stocks, at least it’s on my COVID list or as I call it the “Rona” list of companies that have some kind of implication by the Coronavirus, stuff like that. You know what I am talking about, like Zoom Video ( NASDAQ: ZM ) that kind of jazz; this is one of them.
It has been trading pretty sloppily, I think that’s a word, if not it is now, it has been trading pretty sloppily for a while. Here’s the 200-day moving average because it finally started trading for the 200th day right here. I saw this in our trading forum today; people were talking about WORK ( NYSE: WORK ) when it broke out above 26.00.
So I am looking at it and I go, “I’ll buy that.” The stock gapped down slightly in the morning but then started trading up. I got in at little bit above 26.00, something like that, it might have even been 26.50. I didn’t get a great entry because I wasn’t looking at it but then I saw people are talking about it in the forum and I am going, “Okay, I’m in.”
So now you are looking at this video and you are going, “What do I do? Why are you showing me a stock that is 28.00 and you are saying you got it at 26 and change, something like that? Are you gloating or what?” No not at all. I am going to show you another way that you can effectively do the same thing.
Here’s the deal: You can say, “I wished I had bought 200 shares of WORK ( NYSE: WORK ) at $26.00 but I didn’t. Now it’s at 28.00, now I feel like I am chasing it, it is up almost 11 percent on the day even though it’s after hours. So what am I going to do?” Well, how about if I obligate myself to buy those 200 shares at $26.00? This company doesn’t report earnings until June so I will look at the May puts specifically the $26.00 puts. I can sell those puts, they’re trading for $1.60. So for each put that I sell I can sell it for $160.00 per contract or $1.60 per share.
And so what I am doing by selling a put that expires on the third Friday of May, by selling the $26.00 put for $1.60, I will have the stock forced on me at $26.00 if the stock falls, if it falls to 26.00 or if it falls to 16.00. I have got to buy the stock at $26.00. But I took in that $1.60 and so my cost basis on that trade is not $26.00, it’s not $25.00 it’s 24.40. And that is the $26.00 strike price minus the $1.60 and so this, right here, is my cost basis on those 200 shares. I don’t have to buy it at $28.00; I can buy it at $26.00 with a cost basis of 24.40.
Now, the upside is if the stock pulls back you get it put to you at the price you originally wanted it plus your cost basis is even lower, that’s a good deal. So if that is what you would like to do then this is literally a no-risk trade for you. It is like, “I hope the stock pulls back and I am forced to buy the stock at $26.00 because this is my cost basis.”
The downside is that if the stock keeps running up you don’t get to benefit from that. You don’t make any capital gains in addition to that. However, you could kind of split the difference. Let’s say you wanted to buy 200 shares, well maybe only sell rather than 2 puts maybe only sell 1 put and then you take that second put that you would sell and instead just buy the stock.
And so now you are caught because you have sold the 1 put, you got $1.60, so your cost basis on the new stock would not be 28.00, it wouldn’t be 27.00, it would be 26.40. So you are effectively buying the stock right here where I bought it. So you are selling a put, obligating yourself to buy the stock for a cost basis of 24.40 but then you are also taking the credit from that and applying that to the 100 shares that you are chasing.
You are buying the stock up 10.70; trust me you are chasing the stock. It doesn’t mean you are not going to make money; the stock is already up another $.20 after hours. But this allows you a couple of different ways to get the same benefit of a stock that is moving even though you missed the entry. So give that a shot.
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