Key points
- Lemonade bulls were disappointed by the guidance, but a new opportunity has arrived.
- Sell-side activity is consistent with a trading range that traders can target.
- Covered calls could yield 8% to 10% monthly in March and April.
- 5 stocks we like better than Lemonade
Lemonade NYSE:LMND popped up on Marketbeat’s radar ahead of its fourth-quarter release, popping up for unusual call volume activity, highlighting its marketability if not a good trade. Investors hoping to profit from the surge in stock prices were disappointed by the guidance, which soured the market and knocked nearly 30% off stock prices. Today’s bottom line is that Lemonade continues to see unusually high options activity and could see further volatility this month, meaning it is still a good target for options traders. But which trade?
Technical Outlook: Lemonade is stuck in a sell-covered call range
Lemonade is stuck in a trading range and is unlikely to break out anytime soon. The floor is near $15.50, the ceiling near $20, establishing a solid range for traders to target. As the company is expected to change significantly over the course of the year, LEAPs and long-term calls could be winners. LEAPs and long-term calls provide a cheaper entry than buying stocks and can be used as collateral to sell covered calls until the next catalyst emerges.
Covered calls might provide income as the stock price moves sideways within the range, but will limit gains if the stock hits a new high, so traders should keep that in mind when planning their trades.
The next visible catalyst for the stock won’t be until May when the first quarter is reported, which is three months away, plenty of time for Covered Call traders. However, the guidance may have allowed this company to serve as a positive catalyst at reporting time. The company expects revenue of approximately $112, which is up year-over-year but down sequentially despite expectations of increasing premiums in force and a history of outperformance.
The company could outperform because it is an AI-powered insurance platform in its early stage of growth. The company has steadily grown revenue and expects to double its investment spending this year as it grows its business portfolio. Among the highlights of the fourth quarter report are guidance for accelerating growth in 2024 and a pivot to positive cash flow in 2025.
One scenario for traders today is buying a call with a strike price of $14 or $15 and expiring in June or July. Those are between $4 and $5 and provide enough time to sell two calls, one in March and one in April, and possibly another short-duration call ahead of earnings. Calls sold will be at the high end of the range and could yield up to $0.40 per contract or 8% to 10% in monthly income.
Insiders and analysts help drive volatility
Selling activity is mixed in Lemonade but consistent with a trading range. Insiders and institutions own a substantial portion of the shares and activity is supporting the market, but analysts aren’t buying. Analysts rate Lemonade as a Reduce, leading the market lower with price target revisions. The consensus target has stabilized somewhat since the fourth quarter release, but it is down 35% year over year and is 15% below the current market, so it will weigh on the stock for the foreseeable future.
Institutional holdings are solid and help limit downside risk. Institutions bought steadily from the second quarter of 2023 to the first quarter of 2024, increasing their ownership to 55% and helping the market bottom. Ownership is 50/50 funds and private equity, including large holdings from Vanguard and Baillie Gifford & Co. Baillie Gifford & Co. is a Scotland-based independent investment advisor focused on disruptive assets capable of support long-term growth. He is the 2nd largest holder.
The risks are present for lemonade traders, but the benefits outweigh
Downside risk is minimal for this tech stock, but it is still present. The company’s lack of profits and uncertain trajectory have short sellers concerned, and short interest is high. The latest report predicted short interest above 30%, which is unlikely to change anytime soon, so volatility is to be expected. The worst case scenario is that short sellers will drive the stock below critical support, which is unexpected.
Before you consider Lemonade, you’ll want to hear this.
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