Video game developer Roblox (RBLX) appears to be on a roll. In the last three months, the company’s share price has gained almost 30%. In the trailing 30 days, the stock has popped more than 6%. While the recent run has been impressive, a slow march higher seems to be in the cards. RBLX stock enjoys net positive catalysts. Recently, Roblox issued solid results for its second-quarter earnings. The gaming platform delivered revenue of $893.5 million, up 31% from the year-ago quarter. TipRanks reports that the company’s website traffic has been steadily increasing since November of last year.
Despite the strong traffic and sales numbers, Roblox posted an adjusted Q2 loss per share of $0.46, worse than the consensus view that called for a loss of $0.39. Also, with a price-to-sales multiple of 9.2 times (and a forward sales multiple of 6.55 times), RBLX stock looks pricey relative to its peers in the gaming space. The stock is still a winner, which is why I remain slightly bullish. However, its challenges suggest that a risk-mitigated credit strategy is appropriate.
A Credit-Based Options Strategy
As mentioned, I’m mostly bullish on RBLX stock, which is why I’m proposing the following credit-based options strategy. Most retail investors adopt a debit strategy in the market because of their strong conviction, i.e. they buy a stock (thus paying a debit) and hope that it goes up in value. The risk is the price the investor paid for the security. When it comes to options, many retail folks follow the same principle, paying a debit (in this case, the premium) to acquire calls or puts.
However, the options market also offers a new field of trading called credit strategies. Rather than acquiring the right to buy (or right to sell) an underlying security, they sell this right. In other words, traders underwrite the risk that the stock will not move in the direction that the option buyer wants it to.
This options approach helps when an investor is leaning towards a particular direction in a stock’s price, either that it will rise or fall, but don’t have the greatest conviction in their assumption. With RBLX stock, it’s very possible that the share price will continue moving higher. That said, the size of the move higher is questionable given how far the stock has run in recent months. That means a conservative approach called a bull put spread would be most appropriate.
Building a Bull Put Spread for RBLX Stock
The bull put spread should work with RBLX stock given that I remain cautiously optimistic about the direction of the share price. To extract profits from RBLX stock in a prudent manner, we can trade two Put options, both featuring the same expiration date. First, we receive income (credit) from a sold Put at a higher strike price. Second, we buy a Put at a lower strike price to cap the liability imposed by the short Put.
Investors new to multi-leg options strategies might wonder: Why transact Puts for an overall bullish approach? This is best explained with an American football analogy. Punting on fourth down is technically an offensive action as it puts the opposing team’s offense in an unfavorable position, placing them (hopefully) deep at their end of the field.
The idea of punting the ball is similar, in principle, to a conservative bull put spread. We’re not necessarily betting that the underlying security will run higher. Rather, we’re hoping for two outcomes: Either that the stock will inch higher or will trend sideways above a predefined threshold. Such a play suits my position in RBLX stock because I believe the share price will move higher, just at a slower rate than it has been moving in recent months.
A Specific Trade for Roblox
Again, I remain conservative in my outlook for RBLX stock, almost to the point where I’m borderline neutral on where the share price is headed. For options expiring Oct. 4, 2024, you may want to consider selling for income the $44.50 Put and buying the $43 Put for downside protection. At time of writing, the bid on the short Put was $0.93 and the ask on the long Put was $0.68.
Using the above figures, the maximum profit that can be made is $0.25 per contract or the net credit received. The maximum loss comes out to $1.25, or the difference in the two strike prices minus the net credit received. Notably, the breakeven price is $44.25, which is one of the appealing elements of this trade.
Please note that on Sept. 20, RBLX stock closed at $46.03. Therefore, the trade enjoys a margin of safety of roughly 4%. Plus, RBLX just needs to stay above $44.50 to keep the net premium received. Of course, the problem with this trade is that it’s super boring. Fortunately, you can spice things up.
More Exciting Put Spreads
Let’s suppose you’re not bullish enough to consider a debit strategy but you’re also not excessively cautious. In that case, you may want to consider (for the same Oct. 4 expiry) selling the $46 Put and buying the $40 Put. On Friday, the contract prices to enter this particular bull put spread was $1.40 and $0.42, respectively. The maximum reward is $0.98 and the maximum loss is $5.02. The breakeven price lands at $45.02.
For an aggressive Put spread, you might like the following idea: Sell the $46.50 Put and Buy the $42 Put. At the end of last week, the contract prices were $1.68 and $0.62, respectively. This yields a maximum reward of $1.06 and a max loss of $3.44. The breakeven price lands at $45.44.
What makes this aggressive strategy attractive — aside from the greater reward — is that the loss is capped at a relatively low $3.44. However, RBLX stock must move to $46.50 to extract the highest reward possible. Of course, the probability of success is the lowest among the three options trades. That’s the gamble.
Wall Street’s Take on Roblox
Turning to Wall Street, RBLX stock has a Moderate Buy consensus rating based on 13 Buy, eight Hold, and one Sell rating. The average RBLX price target of $45.47 implies 1.22% downside risk from current levels.
Read more analyst ratings on RBLX stock
Takeaway: You Can Make Money on Low-Confidence RBLX Stock
While Roblox posted a solid Q2 earnings report, it still has some ways to go to win the trust of investors. Also, RBLX stock appears to trade at a rich multiple. Given the likelihood that shares will slowly march higher, a credit-based options strategy known as a bull put spread looks like the ideal trade. This conservative approach allows investors to profit by betting that RBLX will, at worst, move sideways going forward. Investors can choose to dial-up a more aggressive options strategy, if they want.
