Much of the buyout air came out of the Pandora Media Inc (NYSE:P) balloon yesterday as it became clear that Sirius XM Holdings Inc. (NASDAQ:SIRI) was not going to buy out the streaming music company. The impact was grave, as the stock fell 3%. There initially some positivity this morning over the idea of Sirius XM still investing some money, but Wall Street’s bullishness is fading, and so is P stock into the afternoon.
Looking at the long-term chart of Pandora, it’s easy to see why some would label it a falling machete. But the cheaper it gets, the duller the blades — less risk for those who want to try to catch it.
Those are the perils of chasing price performance based on acquisition headlines.
Today, I want to add some speculation to my portfolio. So I will set up a trade on P stock to benefit from near-term chatter and headlines. I won’t chase performance, but I will bet against lower prices.
Even before the Wednesday drop, Pandora stock had already been down to bare bones. It had corrected 35% since December. Selling out of it now sounds like a potential mistake.
The very existence of Pandora has always been a debate ever since the entries of gorilla competitors like Alphabet Inc (NASDAQ:GOOGL), Apple inc. (NASDAQ:AAPL) and
Amazon.com Inc (NASDAQ:AMZN). So a little extra air leaking out of the hopium balloon is not unusual.
Click to Enlarge Statistically, this trade is very close to a coin flip, which is not how I usually use options. But in this case, I am literally betting that the dip we just had marks a short-term low.
How to Trade P Stock
The bet: Sell the P Jun 30 $8 put and collect 50 cents and commit to owning shares if the price falls below our strike. We’ll accrue losses below $7.50 per share.
Only do this if you’re willing and able to own Pandora shares at $8. But since we’d also keep the premium, we should have time to manage out of the position for profit.
Sirius XM and Verizon Communications Inc. (NYSE:VZ) are two potential investors (and I still believe potential buyers) of Pandora. I think the list is long enough that we’ll get some more pops from positive speculative headlines. Those bounces will help us profit, even if the put position fails and I end up owning the shares.
Trading options is risky business. Never risk more than you’re willing to lose.
Learn how to generate income from options . Nicolas Chahine is the managing director of . As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at and stocktwits at .
