When Funko Reports Thursday, Will We See a Sell-the-News Reaction Again?

Earnings reports are tricky. Good news can be sold. Bad news can be bought. What one analyst views as bullish, another might spin to be something bearish. Often, we'll see head fakes. Take Square (SQ) . Last night, the stock traded lower into the $74-$75 range after earnings and now it is green.

Of course, I'm not saying anything that most in the markets don't already know.

That's the challenge. It's also why some of the biggest winning and losing trades in the options market occur around earnings. Catalysts. You have to love catalysts.

Except when you don't.

Back on November 8, 2018, Funko (FNKO) reported earnings ahead of expectations and bumped guidance above consensus. Bulls were greeted with a 20%+ haircut the very next day. Thirty-four days later, shares were still lower by 28%.

Ironically, I don't think the results this quarter are going to be different. I believe the company will beat and provide a slight bump as well. Rolling out original content/characters will take time, but the increase in margins should boost the bottom line. The constant rotation of licensed characters creates a continuous stream of new products avoiding stale inventory. Personally, I'm looking forward to The Office Funko POPS on their way.

Shares of Funko have rebounded in a big way since the Christmas Eve low. This was a name I proposed as a covered call trade almost two months. With earnings set for tonight, I have a different approach. I'm theorizing we'll see a sell-the-news reaction again. The irony here is I'm an advocate of owning shares, so this would be positioned around a long position.

The strategy here is a ratio put trade to either buy additional shares with a cost basis of $15.40 if FNKO falls under $17.50 after earnings or provide some protection against long shares. I'm looking toward the 50-day simple moving average (SMA) as well as the previous gap and support levels as possible downside. Those would land in the $16-$17 range. This is where I see an attractive entry based on what we know now. Should the company's fundamentals/outlook disappoint, this could change, but based on what we know now, this is how I'm approaching wrapping an options trade around long shares.

The Trade:

Buy to open 1 March 15 $20 put at $1.40

Sell to open 2 March 15 $17.5 puts at $0.50

Net Cost $40

Max Risk $1540

Max Profit $210

Breakeven $15.40 and $19.60

Days until expiration: 15

At the time of publication, Timothy Collins was Long FNKO, FNKO ratio put spreads.