Considering Our Options – $Z: Weeping Zillow

by CC November 6, 2013 12:19 pm • Commentary

Zillow has had a wild ride this morning following its better than expected earnings results last night. The stock put in its high of the day on the open which coincided with its 50 day moving average. It’s been ugly ever since. The trade we put on yesterday looked to target a breakdown from recent support around the $80 level. We chose December for the structure as we thought it entirely possible that we could have the initial earnings move wrong. But it is our opinion that most of the high flyer stocks are very close to rolling over and seeing a fairly significant correction from their recent highs.

Screen Shot 2013-11-06 at 10.11.40 AM
Zillow chart from LiveVol Pro

Zillow competitor TRLA is ahead of the game, having already corrected from its 50 day moving average all the way down to its 200 day:

Screen Shot 2013-11-06 at 10.13.04 AM
Trulia chart from LiveVol Pro


If Zillow were to follow suit it would go to the center of the structure we laid out yesterday.

To recap here’s that structure:

TRADE: Z ($81.71) Bought Dec 80/65/50 Put Butterfly for 3.60
  • Bought 1 Dec 80 Put for 6.77
  • Sold 2 Dec 65 Puts at 1.73 each or total of 3.46
  • Bought 1 Dec 50 Put for .29

Break-Even on Dec Expiration:

Profits: Profits below 76.40 and above 53.60. Max profit of 11.60 at $65.

Losses: Losses of up to 3.60 below 53.60 and above 76.40.With total loss of 3.60 below 50 and above 80.

With the stock at about 79.50 this structure is basically unchanged. As you can see above, the December breakeven on this trade is is about 76.40. At that point and below this structure becomes a short premium trade and collects decay each day. The maximum profit sweet spot is $65. If the stock is to hold this support level, or drift higher, this structure decays as a long premium trade but not a great deal initially in either case. The bigger success and failure factor here is in the deltas of the trade. Right here, the structure is net short about 20 deltas. If the stock was to fail here and go lower those short deltas increase as it approaches $65.

So the plan on this trade is simple. See how the stock acts here at support. Since so many buyers were caught offsides this morning, any break of this level could accelerate. And there’s lots of room for that acceleration to take place. The first meaningful support below here doesn’t happen until about $65.

So we’ll be keeping an eye on the stock, looking for it to fail and drop below the 78-80 area of support. If it does look like it will hold here we’ll have to look to get out of the structure as best as we can, but we have a pretty good look for a breakdown here so we’ll be patient for now.