On Steve’s Radar: A Small Company That Could Deliver a Big Profit

On Steve’s Radar: A Small Company That Could Deliver a Big Profit

Posted On September 22, 2021 2:32 pm

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. 

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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. 

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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.

aprn stock chart 2021

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. 

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About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.