DBX options were attractively priced at the time of the recommendation
Subscribers to Schaeffer's Weekly Volatility Trader almost quadrupled their money with the Dropbox Inc (NASDAQ:DBX) June 30-strike straddle we recently recommended. We're going to take a look back to see why we expected heightened volatility on the software stock, and how the options trade unfolded.
A straddle is an ideal options strategy when a stock is targeted to make a fast and aggressive move, regardless of direction. At the time of our recommendation on June 1, Dropbox's Bollinger Band width was at an extreme low, indicating the stock was heading toward a period of volatility expansion. In addition, the equity had begun to form a bullish symmetrical triangle pattern just months after its late-March initial public offering (IPO), implying the security was setting up for an outsized move.
Short sellers had been piling on since the stock at a rapid-fire rate in recent months. Specifically, short interest more than doubled between the April 1 and May 15 reporting periods. This created the potential for increased volatility going forward.
It was also encouraging that near-term options contracts were attractively priced, especially considering a straddle requires the purchase of two options, versus just one. This was according to DBX's Schaeffer's Volatility Index (SVI), which was ranked in the low end of its post-IPO range, hinting at extremely tame volatility expectations.
Following our recommendation, Dropbox stock exploded -- closing higher in eight of the next 10 trading sessions. Though no clear catalyst surfaced, some credited takeover chatter and short selling as reasons for the rally. Whatever it was, we closed the first half of our position on Thursday, June 14, with profits on the straddle already in excess of 100%, while leaving room for more upside. On Friday, June 15, we closed the remaining half of the trade ahead of expiration for a total profit of 274%.
