The Sea is Rising
Sea Limited (SE) is a digital entertainment company based in Singapore. SE reported earnings on Tuesday that showed a wider loss than expected but exceeded revenue estimates. In addition, the company raised its FY21 sales guidance. Wall Street clearly overlooked the profit miss, as several analysts raised their price targets to the $330-350 range (SE closed just above $309 on Friday).
SE has been on a monster run for 2-1/2 years. The stock is up 55% in 2021 and a whopping 27-fold since the end of 2018. More recently, the stock has been riding along the support of its 50-day moving average, a trendline it last closed below three months ago. Note that the short (sold) put strike of our credit spread (red line in chart) is just below the current location of the 50-day (blue line), which is 8.5% below the current stock price. Thus, this trade is relying on that support holding through the trade’s expiration in six weeks.
If you agree that SE will stay above its 50-day moving average, consider the following trade that relies on the stock remaining above 285 through expiration in six weeks.
Buy to Open SE 1Oct 280 put (SE21101P280)
Sell to Open SE 1Oct 285 put (SE21101P285) for a credit of $1.35 (selling a vertical)
This credit is $0.02 less than the mid-point of the option spread when SE was trading at $309. Unless the stock rallies quickly from here, you should be able to get close to this amount.
Your commission on this trade will be only $1.30 per spread. Each spread would then yield $133.70. This trade reduces your buying power by $500 and makes your net investment $366.30 ($500 – $133.70). If SE closes above $285 on October 1, both options will expire worthless and your return on the spread would be 37% ($133.70 / $366.30).