She falls further and further, while the elastic bungee cord continues to stretch.
Once the cord is fully extended, what happens?
She pops right back up.
Markets can behave similarly. Whenever price moves to the extremes, just like a bungee cord, prices will normally tend to revert to the mean.
Fundamentals can drive price spikes, like earnings reports, or re-stated earnings, for example.
Let's take a look at the food delivery service, GrubHub (GRUB).
Click to Enlarge
GRUB got hammered on their earnings report. It got demolished, falling from $59 all the way down to $32, nearly 50%.
This begs a couple of questions.
- Is the GRUB bungee cord stretched as far as it can go, thus propelling GRUB back up? or...
- Did the GRUB bungee cord break, sending the company falling to certain death?
I chose the former, not because I love the earnings report, but services like GrubHub, UberEats and DoorDash are all the rage for stressed out consumers that are too lazy to cook at home or get in a car and go out for food.
So, I bought the following Options Trade on October 30:
3 Contracts GRUB $40 Dec20 CALL at $1.25 per share. $375 at risk.
My Exit Targets are:
My Exit Targets are:
- $39.62 - Return to the 8 EMA (aka "T-Line") Possible 100% Profit
- $42.00 - Return to Weekly/Monthly Pivot. Possible 200% Return
- Everything Else 500% + Return
On the other hand, if GRUB continues to dive, then I will scale out for a loss.
Update November 5: As of this writing, GRUB is on its way up, trading at $1.42 for a 14% profit.
