By: Steve Smith
In early August, the Options360 service bought Blue Apron (APRN), a meal-kit delivery company, through the purchase of call options. Specifically, with the stock trading around $4.30 at the time, we bought the 4-strike call for the September (9/17) expiration for $0.75 per contract; meaning we had about $0.30 of intrinsic value and paid about $0.35 in extrinsic or time premium.
APRN is not a name I’d usually trade, I hate the business model with high customer acquisition costs, high churn rate, and no sign of profit anywhere in sight. The market feels the same; since its 2017 IPO peak of $140, which gave it a $15 billion market cap, the stock has been on a long steep slide to its current $5, turning the company into a micro-cap with a value just north of $100 million.
However, what piqued my interest was the news that the company was able to raise some $20 million in much-needed capital through a secondary offering. It was easily absorbed at $4.25 per share. It felt like something was brewing with the stock and the chart was building a base. Last week, the stock did indeed breakout, jumping some 20% to a high of $5.60. Unfortunately, this occurred two days prior to expiration; meaning our options lost all extrinsic value. While we were able to exit for a small profit, it felt like a missed opportunity.
Not to be deterred, today Options360 established a new bullish (APRN). I still hate the business model. But, like last month when we bought some calls, the new catalyst was like the old catalyst; a new larger, and more dynamic capital raise. Last Wednesday, the company announced a $78 million equity raise, including $45 million reserved for current Class A common stockholders. Here’s the key, this move includes warrants where eligible holders will be able to purchase their pro-rata shares portion at an effective purchase price of $10/share plus associated warrants to acquire additional shares at $15, $18, and $20 exercise price points. The shares/warrants were gobbled up, including $3 million by the company’s co-founder, Matthew Salzberg.
Interesting and eyebrow-raising is Salzberg and co-founding brother Barry Salzberg both announced their resignation from the company’s board of directors. Hence, they’re cutting ties but simultaneously committing an additional investment in expectations of higher prices at much higher prices. Smells like a buy-out in the works. Or, at minimum, maybe it becomes a meme as it does have 10% of the shares sold short.
The chart looks like it’s building a bull flag.
This time around, Options360’s using a different strategy; let’s call it a ratioed, diagonal spread.
Specifically, the trade recommendation in yesterday’s Options360 Alert was:
-Buy to open 3 contracts November (11/19) 4 Calls
-Sell to open 2 contracts October (10/15) 6 Calls
For a Net Debit of $3.80 or $380 for the 3×2 contract position.
This structure, in which we own 1 additional call contract against those sold, gives us unlimited upside and the diagonal or calendar aspect in which we bought November while sold October helps reduce our cost and actually gives us positive theta (gains through time decay.)
The risk is defined as the cost or initial debit of $380. It should be interesting to see how this plays out over the next two months.