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OPEN $85
Event:
-company reports Q4 earnings Feb 8 post close
Price Action:
-stock is up 20% ytd…..ALREADY, and up 240% in a year.
-Options market implying about a 13% post earnings move vs the avg over the last 4 qtrs of ~11.5%
Fundamentals/Sentiment:
-company is firing on all cylinders and has massive first mover advantage at the forefront of 2 very strong secular trends; 1st on-line reservations and 2nd mobile e-commerce, Citibank Internet Analyst Mark Mahaney estimates that only 10% of US restaurant reservations are made on-line and that 10% of OPEN’s reservations are currently made on Mobile phones (which tend to be more profitable)…
-With a $2bil market cap the company could be an easy acquisition for any cash rich large tech or media company looking to bolster e-commerce offerings, but the valuation at ~110x 2011 earnings est and ~20x 2011 sales est make it rich for even a best of breed small cap high growth Internet stock.
-Street fairly mixed on the name with 7 buys and 8 holds, with most concerns centered on valuation.
MY VIEW:
-You would have to have your head checked to short a stock like this (see NFLX), that said, any hint of revenue deceleration and/or margin pressure this stock will head straight back to somewhere between 70 and 60 in a quick……
–While i have no reason to believe the company won’t continue its strong execution and torrid pace of growth, the trader in me says that the stock is priced for perfection given the 20% rally ahead of earnings, these are times i like to make defined contrarian bets or be defensive around long positions.
**USE OPTIONS TO EXPRESS CONTRARIAN BEARISH VIEW INTO TONIGHT’S EARNINGS.
TRADE STRUCTURE 1: BUY the FEB 80/72.5 PUT SPREAD for 2.00
-Buy 1 Feb 80 Put for 3.20 and
-Sell 1 Feb 72.5 call at 2.20
BREAK-EVENS on FEB exp:
–stock 80 or higher you lose the $2 premium you paid (less than 2% of the underlying)
–stock btw 78 and 80 you can lose up to $2
–stock btw 78 and 72.50 you can make up to $5.50
–Stock below 72.50 you make $5.50
OR
**IF LONG CONSIDER STOCK REPLACEMENT INTO POTENTIALLY VOLATILE EVENT
TRADE STRUCTURE 2: BUY ZERO COST MARCH CALL SPREAD RISK REVERSAL
-Sell 1 Mar 75 Put at 3.00
-Buy 1 Mar 90 Call for 5.00
-Sell 1 Mar 100 call at 2.00
**Get structure on for EVEN MONEY
BREAK-EVENS on MARCH EXP:
-NEUTRAL: stock between 75 and 90 on March expiration you lose nothing.
-WORST CASE: Stock 75 or lower you are Put the stock and lose money
-UPSIDE: stock btw 90 and 100 you can make up to $10
-BEST CASE: stock above 100 you make $10
UPDATE: Last night post close OPEN reported very strong earnings for Q4 beating consensus by 11 cents but only beating revs by a fraction. Company did not give full guidance but suggested that revenues for the first qtr would not top that of Q4 which was below consensus.
–Currently an hour into trading the stock has had a very muted move down only 1.32%, i suspect this is largely to do with the very high short interest that equals over 20% of the shares outstanding and almost 1/3 of the float…..Bulls didn’t get enough to sell aggressively thus resulting in a muted move lower and causing shorts to cover now that the event is over….
As for the Suggested trade structures:
1. The Feb 80/72.5 Put Spread, unless u saw something that lead u to beleive that the stock could see additional selling pressure int he next week and half you may consider selling the spread for ~.90 and move and take your loss….my thought was that if the company disaapointed on earnings or guidance you could see an outsized move lower given the 20% rally in the stock ytd….U didnt get it, so move on.
2. the Stock replacement trade- Selling Mar 75 Put and Buying the Mar 90/100 Call spread. i still like this structure instead of owning the stock at current levels more having to do with my near term negative market bias. If the market has a quick sharp sell off stocks like OPEN will get smacked hard, i would rather be short that Put $10 lower than be long the stock and have to make a decision when and where to sell once it starts going lower….the beauty of this structure that if i am wrong and the stock and market don’t go lower u still have $10 of long exposure between now and Mar exp.[/private][/private]