The Big Dip in Switchback Energy Is a Golden Opportunity for SBE Stock

SPACs took the Street by storm in 2020. Their ranks swelled, and many experienced huge gains in the fourth quarter of the year. Momentum traders are salivating over the lot of them and now have SPAC-littered watchlists. Switchback Energy Acquisition (NYSE:SBE) caught my eye at the turn of the year as one of the better setups in the space. Today we’re focusing on SBE stock to analyze how to capitalize on the opportunity.

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If there’s one thing that trading SPACs requires, it’s intestinal fortitude. Said another way, they’re extremely volatile and experience wicked swings. Such is the hook luring speculators in.

But the boon is also a curse. Sure, sky-high volatility works in your favor when prices move in the right direction, but watch out when the switch flips.

Gird Your Loins Before Purchase

The case of SBE stock is instructive. Since November, we’ve seen three sharp corrections form. The first saw prices slide 42% over six trading sessions. The second pulled them lower by 26% over four days. And the third is what we’re in the midst of currently. As of Tuesday’s low, we’ve thus far seen a decline of 31% over six sessions. That’s a lot of ground covered in such a short period of time. Ultimately, it speaks to just how comfortable you need to be with sharp moves if you’re going to place a bet.

Bulls will rightly argue each downdraft was preceded by an even more powerful rally that carried the SPAC to new heights. It’s a smart point that underlines why we still find ourselves in an uptrend despite the monster pullbacks.

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If you can’t quite decide if the outsized volatility is something you can handle, keep in mind the following. First, you control the level of risk through your position sizing. If you’re a stock trader, you could limit yourself to purchasing a small number of shares. The more modest size will allow you better to handle the daily swings in your position value. Second, we can build a defined risk and/or low-cost trade using options contracts.

Despite the newness of SBE, its options have become extremely popular. To wit: the near-the-money strikes all boast over a thousand contracts in open interest for February expiration. The bid-ask spreads are still wider than I’d like, but given the ample volume, I suspect getting filled near the midpoint shouldn’t be a challenge. I’ll share my preferred options strategy in a moment. But first, let’s take a closer look at the price chart.

SBE Stock Chart

SwitchBack Energy (SBE) chart with bull retracement pattern

Source: The thinkorswim® platform from TD Ameritrade

Despite the current retracement breaking the 20-day moving average, we remain above the previous pivot low. Thus, the short-term uptrend remains intact. I suggest drawing a line in the sand at $33. A break below it will officially end the current series of higher pivot highs and higher pivot lows. Until then, I’m viewing this as a buyable dip.

I’m encouraged by the lack of volume seen during the recent drop. Part of that is due to the holidays, sure, but light volume drops are always easier to recover from than high volume ones.

In summary, we have an uptrend with a light volume retracement offering a lower-risk entry to buyers.

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Sell Puts

Because of the high volatility, option premiums are extremely pricey. That makes bull call spread superior to long call if you want to build an aggressive trade. It also increases the appeal of selling naked puts if you want a high probability of profit. Here’s the one I suggest:

The Trade: Sell the Feb $20 put for $1.

Consider it a bet that SBE stock stays above $20 for the next month. If it does, you’ll capture the $100 credit.

On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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