Negative Unusual Options Activity Poses Warnings for This Social Media Firm

Throughout this year, the waking up to realities of prior monetary excesses imposed substantial pain on the equities sector. However, youth-centric social media network Snap (SNAP) suffered the brunt of the damage. Given the catastrophic losses, some bold traders might be tempted to take the contrarian angle. However, rumblings in the options arena suggests that conservative-minded retail investors should probably steer clear of SNAP stock.

Nevertheless, on a guttural level, it’s easy to see why the embattled business would attract eyeballs. Throughout most of the first two years of the COVID-19 pandemic, SNAP stock soared as young people gravitated toward the underlying social network for human connections. Unfortunately for the app maker, the relaxing of COVID-related restrictions enabled folks to connect physically. That took some of the luster off the business.

From October of last year, SNAP stock has only looked like a shell of its former glory. On a year-to-date basis, shares hemorrhaged over 77% of market value through the end of the Oct. 17 session. Of course, the temptation is that with such a viable and popular brand, Snap should be due for a comeback rally.

Still, any revival for SNAP stock will more than likely encounter stiff challenges. Fundamentally, the digital advertisement space suffered substantial headwinds. With companies looking to minimize their expenditures, forward revenue prospects for all social media firms diminished.

Financially, Snap may be a possible value trap. Sure, the 77% YTD discount – which brought SNAP stock well below its initial offering price of $17 a share – is attractive in a purely mathematical sense absent of context. However, with context, the company represents a poor-quality business. For example, its return on equity sits 24% below parity.

Anyone betting on SNAP stock would be taking huge risks. And options traders seem to recognize the blood in the water.

Bears Swarm SNAP Stock

Following the closing bell of the Oct. 17 session, SNAP stock became one of the major highlights for unusual options activity. Out of four entries for the day, three of them were puts. Most notably, bearish traders targeted the $6 puts with an expiration date of March 17, 2023. That gives 150 days since the placement of the order before the options expire worthless.

Volume for the transaction reached 14,158 contracts against an open interest reading of 293. Moreover, the bid-ask spread as represented by the midpoint price (49 cents) came out to 4.08%. That’s fairly narrow, suggesting not only high liquidity for the trade but also confidence in the market maker to properly place the transaction.

For the record, SNAP stock closed in the open market at $10.59. That means for the aforementioned puts to be at the money, shares must decline by 43.34%. That’s incredibly aggressive, given the already steep losses this year.

While general pessimism for social media firms isn’t surprising right now, what might raise eyebrows is Snap’s put/call open interest ratio. Standing at 0.52, this figure demonstrates that more traders are buying calls than puts. Typically, the delineation between bullish and bearish sentiment is 0.70.

Though retail traders apparently are still willing to give SNAP stock a chance, Wall Street analysts are not. Three months ago, Snap enjoyed an average consensus rating of “strong buy.” In the current month, the consensus slipped to “moderate buy.”

Demographic Trends Don’t Favor Snap

Aside from the challenging digital ad space and troubled financials, Snap also runs smack into a demographic headwind. Essentially, the youth-centric social network may pose liabilities over time.

According to the U.S. population pyramid, the ages 20 to 24 cohort represents about 3.4% of the total population for males and 3.3% for females. In the ages 15 to 19 cohort, this segment represents 3.3% for males and 3.1% for females.

Moreover, as one goes down the spectrum – ages 10 to 14, then ages 5 to 9, finally zero to 4 – the size of each cohort declines in number. That means unless Snap offers a social network that matures with its audience, there are fewer and fewer people to bolster the platform as people “age out.”

Frankly, SNAP stock may suffer from the aging out dilemma more so than its peers. At a certain point, the goofy antics that people engage in using Snap’s network loses their appeal. People grow older, start families and follow age-appropriate activities. Thus, while the SNAP discount is attractive on paper, investors should understand the whole picture before making a final decision.

• Pre-Market Brief: Stocks Climb as Strong Earnings Boost Sentiment
• Stocks Surge on Strength in Bank and Tech Stocks
• Roku Might Not Benefit from Netflix Optimism
• Stocks Jump on Lower Bond Yields and Strength in Bank and Tech Stocks