Options Theory: Build a Trade with Me on Roblox
June 10, 2021
Traders should celebrate IPOs. Without them, our universe of choices would be fixed. With them, our universe is always expanding. As an options trader laser-focused on only the most liquid of vehicles, I probably only add around 20% of new public companies to my watchlist. The other 80% simply don’t gain sufficient traction to command my attention.
Roblox has been around since 2004, but only just debuted on the public stage on March 10th of this year. With one earnings report under their belt and a 20-day and 50-day moving average now available, RBLX stock is now free to trade. I featured it as one of my picks on Wednesday’s Trade Masters show, and want to walk through building a sample trade. This is an example for illustrative purposes only – not a recommendation.
The Chart Pattern
RBLX is heading into the weekend with a clean bull retracement setup. The pullback comes after an epic, late-May breakout carried prices beyond the century mark. The volume patterns are perfect. High volume accompanied the breakout to confirm big buyers entered the fray. By comparison, the participation during the past four days of selling has only been average.
This morning’s drop created a test of the 20-day moving average which easily held. Buyers jammed prices toward the high of the day, creating a long lower shadow for today’s ‘candlestick. If prices decide to push below the 20-day, the ceiling of the old trading range looms closely near $80.
I find this to be a perfect pattern for scaling bull puts.
Scaling Bull Puts
The appeal of the bull put is the wide profit range. Suppose we sell the July $75/$70 bull put spread for 75 cents. It’s a bet that pays as long as RBLX stays above $75 – which it will if the recent range break sticks. I like how the short strike is below the 20-day and 50-day moving averages, requiring prices to move well back into the old trading range. The short $75 put has a delta of 15, giving us an 85% probability of profit.
Traders have two choices on the entry. Enter all at once, or scale-in. If you’re confident on the current timing and want to deploy your full position. Then do so. But, if you want to hedge your bets and improve you positioning, then scale in. That is, wait to add the second or third contract until after RBLX has fallen further.
Let’s assume we can do three contracts.
- Tier One: Sell one Jul $75/$70 bull put @ 75 cents.
- Tier Two: Sell one $75/$70 bull put @ $1.13.
- Tier Three: Sell one July $75/$70 bull put @ $1.50.
If RBLX rips higher from here and never looks back, then we’ll only get filled on the first tier. But, if it pushes lower along the way, then we might be able to get triggered into the second and third tier. With each additional entry, we are improving our average credit, thereby increasing our probability of profit.
My stop loss for all three tiers would be $75, which is the short strike price. If RBLX falls to that price, I think my original bullish thesis will have been sufficiently shot to shreds.
On the profit side, I just need 50 cents to capture a 10% return. Here would be my targets for each tier:
- Tier One: Sell one Jul $75/$70 bull put @ 75 cents. Buyback at 25 cents.
- Tier Two: Sell one $75/$70 bull put @ $1.13. Buyback at 63 cents.
- Tier Three: Sell one July $75/$70 bull put @ $1.50. Buyback at $1.00.
Here’s what the order entry might look like for the first tier:
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