Tech stock at potential crossroads

08/18/21
  • ZM tests support level after nine-day, 13% downturn
  • Stock still up around 20% for past three months after 50% correction
  • Options traders should monitor IV, time

While options are often praised for their versatility, their potential advantages won’t do you much good if the contracts you trade don’t align with your trade goals. That’s sometimes easy to forget when you’re focusing on other aspects of the market.

For example, this week Zoom Video (ZM) has been pressuring its July low around $343.80 after retreating from a test of its early July high around $406.50:

Chart 1: Zoom Video (ZM), 6/3/21–8/17/21. Zoom Video (ZM) price chart. Pulled back to July low.

Source: Power E*TRADE (For illustrative purposes. Not a recommendation.)


Zoom has been on quite a ride over the past couple of years, rallying more than 800% between October 2019 and October 2020 before sliding 50% into its May 2021 lows as widespread vaccinations and an eye toward returning to offices and classrooms squelched some of the bullish momentum in ZM and other pandemic winners.  

In recent months, though, “hybrid” has become a watchword as more businesses appear to be embracing more flexible work arrangements—one study estimates 40% of employees may continue to work at home at least occasionally over the long term,1 a potential reality that may partially explain the rebounds in stocks like ZM.

It will be a while before we know how those forecasts shake out. In the meantime, despite its most recent pullback, ZM is up around 19% from its mid-March lows, and surprised to the upside with its last earnings release on June 1 (the next one is tentatively scheduled for the end of the month).2 A longer-term chart shows the stock’s current levels are actually part of a larger support-resistance zone that started as the high of the March–April consolidation (which the stock broke out of in early June), and then morphed into support: 

Chart 2: Zoom Video (SLF), 9/11/20–8/17/21. Zoom Video (ZM) price chart. Longer-term support-resistance.

Source: Power E*TRADE (For illustrative purposes. Not a recommendation.)


Such levels often prompt traders to take positions because of expectation they could continue to trigger accelerated price moves. For example, ZM’s repeated failure to push above the resistance level in March and April was followed by the sell-off to the May lows, while the stock jumped 16.5% in a little over two weeks after testing the same level in mid-July.

But regardless of whether they’re bulls expecting another bounce off support or bears anticipating another breakdown, options traders need to be mindful about using contracts that don’t put them at a disadvantage. For example, the implied volatility (IV) for ZM’s September options was above its 30-day average yesterday. Given high IV can inflate options prices—and the fact that these options will soon enter a period of accelerated time decay—some potential options buyers might consider other contracts. Options sellers, on the other hand—even if they’re bullish on the underlying stock—could find these same characteristics could work in their favor.

Market Mover Update: Monday marked the seventh time since April that the S&P 500 (SPX) closed at a 50-day (or longer) high and the Cboe Volatility Index (VIX) also closed up. Tuesday marked the sixth time out of seven that the SPX closed lower the next day.

Sonos (SONO) gave back some of its recent price surge, falling more than 4% intraday on Tuesday (see “News and momentum”). NetEase (NTES) continued its run of volatility, dropping below its late-July low before closing higher (see “Options for volatile stocks”).

Today’s numbers include (all times ET): Mortgage applications (7 a.m.), Housing Starts and Permits (8:30 a.m.), EIA Petroleum Status Report (10:30 a.m.), FOMC minutes (2 p.m.).

Today’s earnings include: Analog Devices (ADI), Bath & Body Works (BBWI), Weibo (WB), Nvidia (NVDA), Target (TGT), TJX Companies (TJX), Lowe's (LOW), Keysight (KEYS).

 

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1 Barron’s. Zoom Video Stock Jumps Because the Hybrid Work Outlook Is Very Good. 7/29/21.
2 StreetInsider.com. Zoom (ZM) Reports Strong Q1 Results, Analysts Raise PTs After Beating 'High Expectations' But Many Remain Sidelined as Growth to Normalize. 6/2/21.

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