Shares of Pandora (P) got hammered Monday, falling over 10 percent as spooked traders and investors scrambled to take profits from the stock’s meteoric rise in 2013. Prior to the session, shares were up 165 percent year to date.
The sell-off was sparked by Apple who, in a side note to its announcement it had sold nine million iPhones over the weekend, mentioned 11 million unique listeners had tuned into its newly debuted iTunes Radio.
THE MARKETPLACE
I’ve been critical of Pandora for some time, citing more costly services such as the private, Swedish streaming service Spotify as offering superior features users prefer (and will pay for). Spotify was also a large source of revenue for record labels in 2012, second only to iTunes, with five million users paying the $9.99 monthly fee.
THE TECHNICALS
When I look at the Pandora chart, the two most recent sharp drawdowns occurred on May 24th and July 9th of this year. I’m neutral to bearish in the near-term, but not especially negative, so I like how a near-the-money October serial Bear Put Spread sets up. By selling a further out-of-the-money put, I help finance the more expensive near-the-money put, and simultaneously cap my risk.
OPTIONS TRADE
I can buy P Oct 24 Put for $1.48 and simultaneously sell P Oct 22 Put for $0.65, to put on the P Oct 24-22 Bear Put Spread about $0.83.
MY TRADE
Buy the P Oct 24-22 Bear Put Spread for about $0.83
Risk: $83 Per 1 Lot
Reward: $117 Per 1 Lot
Break-even: $23.17
BOTTOM LINE
This trade offers me fair return on my money, and only requires P (currently trading $24.26) to move down another buck for me to reach break-even.
