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The Parabolic Surge Fades Just in Time for Earnings, See What to Expect and How to Play It

The Parabolic Surge Fades Just in Time for Earnings, See What to Expect and How to Play It

Pinduoduo Inc (PDD) is an e-commerce platform operator that provides value-for-money merchandise and interactive shopping options. The platform is built to resemble a virtual bazaar of a broad spectrum of products. The company is set to announce earnings this week on May 22 before the market opens.

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  • Analysts are currently expecting earnings to decline from -0.17 1Q last year to -0.27 this year with revenues increasing 17.4% from $599.77 million to $704.2 million. The company has beaten analyst estimates in three of the last four quarters.

    The options market is currently pricing in a +/- $9 move over earnings. That move is derived from the difference in average implied volatility of the 22 MAY 20 expiration and the 29 MAY 20 expiration. The movement represents one standard deviation or a 68% probability range.

    After being range-bound for several months, the company’s share price broke out on April 20. The company carries very high short interest, and the precipitous move since then is certainly representative of a short squeeze. As the price has rallied from $30 to $70 in two months, the price appears to have hit a sticking point. The candle pattern that formed on Monday and Tuesday is a bearish formation leading into the announcement on Friday.

    The near-term expectation is for the price to retrace the up move to around $57. That is short of the expected move, but many companies are falling short on the high volatility expectations this earnings season.

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  • Option traders may want to consider a 19 JUN 20 63.5/62.50 long call vertical for $0.50 or less. If the price is lower following the earnings, look to close for $0.75 or more. Otherwise the max gain of $50 will be achieved if the price closes below $62.50 by expiration.