If traders wanted drama out of this year’s presidential election, they’re receiving no shortage of it. The latest example hails from Madison Square Garden in New York, which was host to a wildly controversial rally for former President Donald J. Trump. However, the underlying pugnaciousness has been nothing but gold for alternative video-sharing platform Rumble (RUM).
Essentially a conservative version of YouTube, Rumble offers a digital stage for voices that don’t particularly align with mainstream frameworks. It has benefited from strong grassroots sentiment as certain creators lash out against “cancel culture.” As well, the Trump campaign team has a special relationship with Rumble. Therefore, a second administration could do wonders for RUM stock.
On Sunday, Trump took to the stage in front of a packed arena at The Garden. However, an opening act by a comedian drew backlash for unsavory and offensive remarks. Still, investors appeared to be looking more at the financial implications of the event. Taking aside the questionable comedic performance, the takeaway was that “The Donald” is much more popular than his critics give him credit for.
If Trump wins a second term, that will likely provide a much-needed boost for RUM stock. While the underlying company may resonate with its core users, the business is still small and unprofitable. Even more worrisome, sales slipped in its most recent quarter — not something you want to see in a “growth” firm.
Still, it’s a risky wager. If you want to take a shot, you may want to consider a smarter approach.
Take What the Market is Giving with RUM Stock
There’s no question that RUM stock represented one of the hottest trades on Monday, with shares gaining over 14%. In the trailing month, they’re now up nearly 21%. Even the afterhours session showcased sustained enthusiasm. Therefore, it seems unlikely that Rumble will collapse prior to the election (barring some unexpected political developments).
Sure enough, RUM stock ranked among the top highlights in Barchart’s screener for unusual stock options volume. Following Monday’s close, total volume hit 29,015 contracts against an open interest reading of 146,256 contracts. Further, the volume level was 306.71% higher than the trailing one-month average metric.
Notably, call volume reached 23,333 contracts versus put volume of 5,682 contracts. Among the calls, options flow data showed that the $7 strike with an expiration date of Nov. 15 generated considerable interest. This suggests that the institutional players are piling into this trade.
Given this potential framework, I have another idea: why not sell this hot ticket?
With so much unusual demand for this call option, you’re going to receive more credit (income) than you normally would. Further, if you sold the call as part of a bull call spread, you could cap downside exposure while still betting long on a more realistic proposition (i.e. buying a call with a lower strike price).
Here’s the thing: if you want to buy the $7 call that other investors are piling into, RUM stock would need to hit that price plus the underlying premium just to break even. The ask of this option comes out to 70 cents as of Monday’s close. So, that’s $7.70 or almost 19% up from yesterday’s closing price of $6.48.
It’s not impossible but a bull call spread may be a better proposition. Let’s say you sell the $7 call at a bid of 60 cents. The proceeds of this sale can offset the debit of, say, the $5 call, which carries an ask of $1.75. So, by combining these two legs into one trade, you have a net debit paid of $1.15. Further, the breakeven price comes down to a much more manageable $6.15.
Two Ways to Win
Of course, a bull call spread is not a risk-free proposition. If Trump doesn’t win the presidency and Rumble stumbles, you can be at risk of losing the entire principle of the trade (the $1.15 net debit). Further, if RUM stock gains spectacularly, your profit would still be limited to the maximum reward of 85 cents, which translates to a 73.91% payout.
Contextually, though, the bull call spread can be a powerful weapon in your arsenal. In this case, Rumble is an unpredictable enterprise. With the spread, you’re able to offset some of the debit required for a long options-based position. Even better, the profitability threshold (the breakeven price) comes down to below the current market price.
That means there’s two ways to win with the 5.00C/7.00C spread. The security can continue to rise higher or it can stay steady. In the latter case, you’re hoping for theta decay to erode the opposing side’s position. Obviously, the maximum reward will only arrive if RUM stock hits $7 or higher. Still, if RUM was at $6.48 at expiration, the payout would be almost 29%. That’s not bad.
Plus, the election results offer no guarantees about what will happen with RUM stock. Because circumstances are so up in the air, reducing the net debit paid with the sale of a hot ticket could be a prudent idea.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
