How Large Option Traders Are Playing Snap Following Big Earnings Rally

Snap Inc SNAP cooled off a bit on Monday after the stock's booming three-day rally following a blowout third-quarter earnings report last week.

A flurry of large Snap option trades have been mixed in nature on Monday as investors struggle to determine whether or not the Snap earnings rally is over or just getting started.

Related Link: How Large Option Traders Are Playing Intel Following Earnings Sell-Off

The Snap Trades: On Monday morning, Benzinga Pro subscribers received 38 option alerts related to unusually large trades of Snap options. Here are a handful of the biggest:

• At 9:58 a.m., a trader bought 367 Snap call options with a $28 strike price expiring on Jan. 15 near the ask price at $16.097. The trade represented a $554,059 bullish bet.
• At 10:13 a.m., a trader bought 500 Snap call options with a $32 strike price expiring on Nov. 20 at the ask price of $10.301. The trade represented a more than $515,050 bullish bet.
• At 10:21.m, a trader bought 619 Snap call options with a $33 strike price expiring on Jan. 15 at the ask price of $9.801. The trade represented a $606,681 bullish bet.
• At 12:03 p.m, a trader sold 5,000 Snap put options with a $32 strike price expiring in January 2023 at the bid price of $6.451. The trade represented a more than $3.2 million bullish bet.

Of the 38 total large Snap option trades on Monday morning, 21 were calls purchased at or near the ask or puts sold at or near the bid, trades typically seen as bullish. Another 14 trades represented calls sold at or near the bid or puts purchased at or near the ask, trades typically seen as bearish.

Three trades were executed near the midpoint of the bid-ask spread, a price typically considered neutral.

Why It's Important: Even traders who stick exclusively to stocks often monitor option market activity closely for unusually large trades. Given the relative complexity of the options market, large options traders are typically considered to be more sophisticated than the average stock trader.

Many of these large options traders are wealthy individuals or institutions who may have unique information or theses related to the underlying stock.

Unfortunately, stock traders often use the options market to hedge against their larger stock positions, and there’s no surefire way to determine if an options trade is a standalone position or a hedge. In this case, given the relatively large size of the largest Snap trades, they could potentially represent an institutional hedge.

Snap Rally Set To Resume? Snap shares briefly hit another 52 week high on Monday before the stock dropped more than 3% in an extremely weak market. Snap shares are up 197.6% in the past year, and much of that rally came after the company reported a huge rebound in its advertising business in the third quarter.

Snap reported better-than-expected third-quarter earnings and revenue and an 18% year-over-year increase in daily active users to 249 million.

A number of analysts reiterated bullish ratings and raised price targets for Snap following the report. KeyBanc said Snap is “firing on all cylinders,” citing 52% revenue growth, strong user engagement, a record number of advertiser wins and rising wallet share.

There’s no question Snap delivered a huge quarter for investors, but large option traders now must determine just how much future success is priced into the stock after rallying more than 40% in a matter of days.

Some analysts also pointed to Snap’s persistently negative free cash flow as a reason to be cautious. Needham highlighted Snap’s historical issuance of millions of new shares to attract and hold onto employees.

Benzinga’s Take: Among the flurry of large Snap option trades on Monday morning, the bullish trades outweighed the bearish trades by a wide margin, suggesting more traders are buying the Snap dip than selling into the weakness. In fact, all four of the largest option trades of the day were bullish in nature, including someone selling more than $3.2 million worth of long-term Snap puts expiring in January 2023.