Recovery Trade Case Study: The Trade Desk

It’s been a tale of two markets the past two weeks. On Feb. 16, the S&P 500 logged its first weekly decline since early January thanks largely to a pair of hotter-than-expected inflation reports. Last week, the index rose 1.7%, closing at a new record, as investors cheered Nvidia’s (NVDA) earnings report.

We added three new Options Income Weekly positions last week, selling puts on Uber Technologies (UBER), Intel (INTC) and ProShares Bitcoin Strategy ETF (BITO). While we didn’t have any closeouts last week, we booked three winning positions the week prior, generating $342 in cash and averaging a 1.7% return per trade. 

This included our fourth winner on Celsius Holdings (CELH) since we began trading the popular energy drink maker in September. (Read more about our success trading CELH here.)

But the position I want to take a closer look at is our recovery trade on The Trade Desk (TTD), which is a great example of how you can manage a trade that goes against you.

The Trade Desk operates a cloud-based platform that advertisers use to manage their online campaigns. We entered a buy-write on Sept. 12, purchasing shares at $86.44 apiece and selling the TTD 6 Oct 87 Call for $3. Our goal was to generate income by selling calls for credit every couple of weeks.

As you can see in the chart below, which covers the entire time we were in the position, TTD traded lower out of the gate.

A few days before our Oct. 6 call was set to expire, we rolled it out a few weeks and to a lower strike to the TTD 20 Oct 84 Call, picking up another $1 in credit to add to the initial $3 we collected.

On Oct. 10, we rolled again, this time to the TTD 10 Nov 86 Call, for a net credit of $2.40. This took us out past the company’s third-quarter earnings report date.

On Nov. 9, The Trade Desk reported better-than-expected earnings of $0.33 per share, beating by $0.04, while revenue of $439 million beat by $6 million and was up 24.9% year over year. But like many companies were doing at that time, The Trade Desk lowered guidance for Q4, projecting revenue of $580 million versus an expected $611 million.

A number of Wall Street analysts came to The Trade Desk’s defense, saying they expected continued strength in the digital media advertising space, especially with an election coming up. But the stock sold off sharply, as you can see above, with a big gap down on the open and closing the day down 17%.

The reaction to the report was surprising, but we assured members that we viewed TTD as a longer-term income play. We noted that we had a good deal of credit built up from selling calls and the stock was likely to regain some of the lost ground as many tech stocks that guided lower had begun to trade higher. 

It took some time, but in late November the stock finally managed to string together three consecutive up days, putting us in a good position to sell a new call option against our shares. 

With TTD trading just above $69 a share, we recommended members sell the TTD 15 Dec 74 Call for $0.66.

The stock continued to trade higher, and our call went into the money. Rather than allow our shares to be called away at $75, which would have resulted in us taking a loss on the position, we rolled out a few more weeks and to a higher strike price — to the TTD 5 Jan 75 Call — picking up an additional $1.30 in credit.

Now, if you recall, the first few days of 2024 were not too kind to investors, especially in the tech sector. Shares of The Trade Desk sold off and we let our call expire worthless, saying we would sell another one once the stock traded higher for a few consecutive days. 

On Jan. 23, with shares trading around $71, we recommended the final call trade for this position, selling the TTD 16 Feb 77.50 Call for $2.89. By this time, we’d built up $11.25 in cash from selling calls. Since we purchased shares at $86.44, that meant our cost basis was $75.19.

The new call again took us out one day past the company’s earnings date of Feb. 15. This time, though, things were quite different. Q4 EPS of $0.41 missed by $0.02. However, revenue — the most important number for a growth company in the digital advertising space — of $606 million beat by $23.77 million. The company upped its Q1 guidance, and the stock opened 18% higher the next day at $89.50.

Rather than wait around for any retracement, we recommended members exit the position, buying back the call and selling their shares. 

Sure, it would have been nice to capture more of the post-earnings pop, but when all was said and done, we walked away with a profit of $2.41, or $241 per 100 shares. This was despite the fact that TTD sold off as much as 29% during the time we held shares. 

Had we panicked when our position was deep underwater in November or January, we would have incurred significant losses. 

By staying calm and selling calls once we saw the stock move higher for a few consecutive days, we managed to turn TTD into a decent win. It’s just one more example of how patience pays when selling options.

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