• Roblox (RBLX) the stock is finally showing flashing signs of a bottom.
  • Although more evidence is needed before declaring victory, the bulls have their best chance of reversal within months.
  • Here are two trading ideas on how to capitalize.

Source: Michael Vi / Shutterstock.com

For months, the strong discount in Roblox (NYSE:RBLX) has attracted bottom fishermen. But so far, trying to hit rock bottom has resulted in bruised egos and battered accounts.

The selling was relentless and there were too many missed rebounds to count. RBLX stock cratered 85% peak to peak in the biggest drop in growth stocks since the dot-com crash.

That said, I find his behavior after the recent results announcement constructive. In fact, I’m more interested in dipping my toe in the water than at any time this year.

Teleprinter Company Price
RBLX Roblox $33.87

RBLX stock rallied on weak earnings

This earnings season has seen pain and destruction visit a wide range of companies. Even minor failings were ruthlessly punished. This week’s crashes at walmart (NYSE:WMT) and Target (NYSE:TGT) are just the latest examples.

Closer to the wheelhouse of Roblox, we’ve seen growth stocks like netflix (NASDAQ:NFLX) and Teladoc (NYSE:TDOC) get taken to the cleaners. Consider the response to Roblox’s disappointing numbers with this backdrop in mind. The stock actually rose after reporting bigger than expected losses and earnings!

When prices stop reacting to terrible news, it means sellers are exhausted and the stock has already priced the worst. With RBLX having already destroyed a legion of investors by declining 85%, anyone following the company is certainly hoping the end is near.

Support buildup and relative strength

Roblox (RBLX) stock chart with potential bottom pattern.

Source: TD Ameritrade’s thinkorswim® platform


But it’s not just the lack of sales after profits. This is also the upward follow-up on substantial volume that we have seen. High volume days signal that institutions are accumulating stock. It’s a positive omen that has been largely lacking in Roblox until now.

Watch for a break above $36, which is the previous pivot high. Beyond that, breaking above the 50-day moving average would add secondary confirmation of a reversal in the daily downtrend.

I have one more reason to be optimistic. Growth stocks as a whole have shown relative strength this week. It’s like Walmart, Target and the rest of the retail industry are destroyed, the bears have found a new toy to play with and they’re finally leaving the growth factor alone. It may be wishful thinking, and it’s the lull before another storm, but I find this week’s outperformance from RBLX a nice change of pace.

Two RBLX Smart Stock Trades

If you want to use options to improve your profit probability or increase potential returns, here are my two favorite ways to play.

Implied volatility is still rich enough to make put options attractive.

Redeem one: Sell June $22.50 naked put for 56 cents.

Consider this a bet that RBLX stock will stay above $22.50 for the next month. If not, you’re stuck buying shares for $21.94, which might not be a bad entry price anyway.

Try a bullish buy spread if the 56 cents per share payday isn’t aggressive enough. This one offers the potential to capture a 200%+ return.

trade two: Buy July bullish $35/$45 buy spread for $3.15.

You risk $3.15 to gain $6.85 if the stock reaches $45.

As of the date of publication, Tyler Craig had (neither directly nor indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.

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