TrueCar Gap Play

Occasionally, my day job intersects with my passion for the stock market. Below is the Finviz chart of TrueCar. This company has great potential, and some challenges. I believe the selloff on last quarter’s miss was overdone. Even the downgraded price target is $9, and the short interest at 8.5 is ripe for a squeeze.

The chart shows price having made a double bottom, and now breaking out of the downtrend channel. It has been in a bullish flag formation for the past two weeks, and looks primed for a gap fill back toward $10.

TRUE

The play, of course, is long from $7 to 10. Ideally, you would wait until price enters the gap, and then exit around $9.80 for a 40% gain. Unfortunately, the next earnings report is November 5, which could slap the stock right back into the down channel – or up above the gap.

Because of earnings, this trade must be done using options. As of this writing, the December 18 $7.50 calls are trading for $0.30. This makes our gap play more of an earnings play, so don’t try it unless – like me – you have some confidence in the fundamentals. The call profile is below:

Call Profile

It’s a thin market, so we want to be “near” the money and prepared to exercise. Risk is $0.30 per share and, if the gap fills by expiration, reward is $2.00.

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