Trade Alert: Betting Against A Bank Vendor

One that's been rallying despite headwinds.

Note: I’m trying something a little different here, posting a trade idea before I get it filled. It’s been a while since I’ve posted one, so I didn’t want to wait longer to post this.

A Month Since The Bank Failures

It’s been a little over a month since the failures of Silicon Valley Bank and Signature Bank, and some parts of the market seem to have traded as if all the problems are behind us. One investor who disagrees is Warren Buffett, who was asked about the banking situation in a recent interview. Jim Bianco read between Buffett’s tactful lines:

Rallying Despite The Headwinds

Given the headwinds of unresolved problems within the banking industry such as deposit flight (a slight reversal in early April notwithstanding), and predictions of a coming recession, how would you expect a company that sells to banks to be performing now? Probably not that well, right? Now what if its fundamentals looked like this:

That probably wouldn’t raise your expectations much. But as it happens, this company’s stock is up more than 60% in the last month.

Granted, there has been one piece of good news for the company in that time: it raised its revenue guidance for the most recent quarter, though expectations are it will post another loss. Our trade is a bet that the quarter’s good news has been priced into the stock and shareholders may be somewhat disappointed by the actual earnings.

Details below.

The company is Cardlytics, Inc. (CDLX). It’s scheduled to announce its earnings on May 2nd. I placed a limited order to buy a put spread on it buying the $7.50 strike puts expiring on May 19th (the soonest expiration date post-earnings) and selling the $5 strike puts expiring on the same date for a net debit of $1.15 on Friday. The break even price for this trade would have been with CDLX at $6.35 (CDLX closed at $6.39 on Friday).

Looks like I will have to raise the net debit to have a better shot at getting this filled at current prices, which will lower the break even price by a corresponding amount. E.g., if I have to raise the net debit to $1.25 from $1.15, I will need CDLX to drop below $6.25 to make money on the trade. With one contract in each leg, in that scenario, your maximum downside would be a loss of $125, and your maximum upside would be a gain of $125. With 10 contracts per leg, you’d have a maximum possible loss of $1,250, and a maximum possible gain of $1,250, and so on.

Ideally, we’ll get a bounce in CDLX next week that will let us enter this trade at a better price.

4/17/2023 Update

I got a fill on this at a net debit of $1.25 today.