Unity Software Inc. (U:NYSE)
Price at Preparation: $28.16 (Nov 13, 2023)
What they do
Unity Software, Inc (NYSE:U). engages in the development of video gaming software. It also provides software solutions to create, run and monetize interactive, real-time two-dimensional and three-dimensional content for mobile phones, tablets, consoles, and augmented and virtual reality devices. Its platform is used by developers, artists, and designers to build content for gaming, film, retail, automotive, architecture, engineering, and construction industries. The company was founded in 2004 and is headquartered in San Francisco, CA.
The primary reason for the trade is to take advantage of the reaction to earnings on Nov 9th, 2023 for Q3 ’23 in which they had a surprise earnings beat of 88.87% (Estimated 0.17, Actual 0.32). ThetaBandits was watching the stock price around the $25 mark as this was near 52-week lows. They did have news of their CEO being resigning due to a change in pricing announcement, which was subsequently reversed. More volatility occurred due to game studios threatening to change engines for their software however, with the amount of work that will take, we take the position that the probability of a mass follow through is low. On the technical side Unity has been unable to break the supports down and have bounced off the low’s multiple times, and we’re betting this will happen again. The 52-week high is $50.08, but consensus price target is $32.16 (+14.2%) with a high estimate of $49.00, so we believe there is room to run. I would consider taking profit and exiting the position above $47.13 using the lines drawn below.
As the stock is moving up as post earnings, a potential plan is to open a position by buying 100 shares of U at market price ($28.16), expecting this to continue upward. Earnings volatility dropped shares as low as $22.20, hence waiting to play the reaction post earnings once a direction has been confirmed. For this plan since buying a board lot of 100 shares, we can utilize a covered call strategy to secure profit. As a trade one could sell a $32 (consensus average price target) call option for February 2024 and collected the premium from this. If the option expires above $32, we will have secured ~$400 plus the premium of the option sold. If the option expires below $32, one will retain the shares and all of the premium, as well as be able to sell another covered call option, repeating the process.
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Risk for this strategy is that upside is capped, so as a trader one must be comfortable with the strategy. However, if the stock does go down, we would retain the shares and keep selling options against the position, which in turn lowers the cost basis of the shares. If the price dropped below the cost of the shares (including the option premium collected), on option expiration we would sell the shares to minimise the loss.
Disclaimer: This article is for informational and educational purposes only, not investment advice. We recommend researching and consulting with a financial advisor before making investment decisions. All actions based on this information are at your own risk.