Uneasy About Further Declines In Uber Shares? Try A Bear Put Spread

Investors in ride-hailing heavyweight Uber Technologies (NYSE:UBER) have not had a good 2021. UBER stock, which trades around $38, is down 25% year-to-date.

Uber Weekly Chart.

Shares saw a 52-week low on Nov. 20. The 52-week range for UBER stock has been between $37.09 - $64.05, while the company’s market capitalization stands at $69.9 billion.

Recent metrics suggest that the global ride-sharing market was worth more than $73 billion in 2020, a year that was marked by shutdowns due to COVID-19. This year, however, saw the reopening of most economies across the globe, providing positive momentum to the segment. As a result, analysts expect the market to go over $340 billion by 2030.

Meanwhile, the smart mobility market is expected to be around $47 billion in the U.S., where Uber and Lyft (NASDAQ:LYFT) compete for market share. Recent metrics show that Uber commands about 69% of the market vs. 31% by Lyft.

However, the Omicron variant of COVID-19 has brought heightened volatility and fresh worries for investors on transportation stocks, including Uber. In the past week alone, shares are down about 11%.

Uber released Q3 results on Nov. 4, posting revenues of $4.8 billion, up 72% year-over-year. However, its net loss was $2.4 billion, mainly due to the loss in investments, especially in Chinese mobility tech platform Didi Global (NYSE:DIDI).

On June 30, the Chinese ride-hailing stock was listed as an American depositary receipt (ADR) on the Big Board. However, since then, DIDI shares have come under the regulatory scrutiny of Chinese authorities and lost more than half of their value. Investors in the U.S. are nervous that DIDI could possibly de-list its shares in the U.S., which would mean additional losses for Uber.

Prior to the release of quarterly metrics, UBER stock was around $45. Now, shares are even lower.

Next Move In Uber Stock?

Among 45 analysts polled via Investing.com, Uber shares have an “outperform” rating, with an average 12-month price target of $67.50. Such a move would imply an increase of about 67.5% from the current level. The target range is between $34 and $82.

Consensus Estimates of Analysts Polled by Investing.com.

Chart: Investing.com

However, many investors are likely to be nervous on how the shares could fare in the coming weeks given the risks associated with the Omicron variant as well as DIDI stock.

We expect UBER to potentially drop toward $35 or even slightly below. In that case, the $32.5 level should act as support. Following such a potential decline, Uber shares are likely to trade sideways for several weeks until they establish a base, possibly around $35, and then start a new leg up.

Therefore, Uber bulls with a two- to three-year horizon who are not concerned about short-term volatility could consider buying the stock around these levels for long-term portfolios.

Others, who are experienced with options strategies and believe there could be further declines in UBER shares, might prefer to have a bear put spread.

However, most option strategies are not suitable for most retail investors. Therefore, the following discussion is offered for educational purposes as opposed to an actual strategy to be followed by the average retail investor. Note: this is a risky trade that's not suitable for beginner options investors.

Bear Put Spread On UBER Stock

Current Price: $37.40

In a bear put spread, a trader has a long put with a higher strike price as well as a short put with a lower strike price. Both legs of the trade have the same underlying stock (i.e., Uber here) and the same expiration date.

The trader wants UBER stock to decline in price. However, in a bear put spread, both the potential profit and potential loss levels are limited. Such a bear put spread is established for a net cost (or net debit), which represents the maximum loss.

Let’s see with an example:

For the first leg of this strategy, the trader might buy an at-the-money (ATM) or slightly out-of-the-money (OTM) put option, like the UBER Jan. 21, 2022, 37-strike put option. This option is currently offered at $2.65. It would cost the trader $265 to own this call option that expires in slightly less than two months.

For the second leg of this strategy, the trader sells an OTM put, like the UBER Jan. 21, 2022, 32-strike call option. This option’s current premium is $0.95. The option seller would receive $95, excluding trading commissions.

Maximum Risk

In our example, the maximum risk will be equal to the cost of the spread plus commissions. Here, the net cost of the spread is $1.70 ($2.65 – $0.95 = $1.70).

As each option contract represents 100 shares of the underlying stock, i.e. UBER, we’d need to multiply $1.70 by 100, which gives us $170 as the maximum risk.

The trader could easily lose this amount if the position is held to expiry and both legs expire worthless, i.e., if the UBER price at expiration is above the strike price of the long put (or $37.00 in our example).

Maximum Profit Potential

In a bear put spread, potential profit is limited to the difference between the two strike prices minus the net cost of the spread plus commissions.

So in our example, the difference between the strike prices is $5.00 ($37.00 – $32.00 = $5.00). And as we’ve seen above, the net cost of the spread is $1.70.

The maximum profit, therefore, is $3.30 ($5.00 – $1.70 = $3.30) per share less commissions. When we multiply $3.30 by 100 shares, the maximum profit for this option strategy comes to $330.

The trader will realize this maximum profit if UBER price is at or below the strike price of the short put (lower strike) at expiration (or $32.00 in our example).

Those readers who have traded options before are likely to know that short put positions are typically assigned at expiration if the stock price is below the strike price (i.e., $32.00 here). However, there is also the possibility of early assignment. Therefore, the position would need monitoring up until expiration.

Break-Even UBER Price At Expiration

Finally, we should also calculate the break-even point for this trade. At that break-even price, the trade will not gain or lose any money.

At expiration, the strike price of the long put (i.e., $37.00 in our example) minus the net premium paid (i.e., $1.70 here) would give us the break-even UBER price.

In our example: $37.00 − $1.70 = $35.30 (minus commissions)

Bottom Line On Uber Shares

We regard UBER stock to be a solid long-term choice for most retail portfolios that want exposure to ride-hailing and smart mobility platforms. However, shares could come under further pressure in the weeks ahead. Therefore, a trading strategy as in this example might be appropriate for some traders with a bearish outlook on Uber.