Zillow has been wild since we put on this bearish Put Fly (below) trade on but it’s been consistently lower highs and lower lows to this point. With only a few weeks left until expiration and the stock nearing another one of those possible bounce points (200 day moving average) we thought it was good timing to close this winner.
ACTION – Sold to close the Z ($71.65) Dec 80/65/50 put butterfly at 7.20 for a 3.60 profit
**The market on this spread is very wide, I put in a mid market offer and got filled.
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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
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Original Post Nov 5th, 2013: Adult Swim Trade – $Z: Weeping Zillow
Earlier today Enis previewed Z’s Q3 results expected after the close (below) where he concluded:
Without any strong fundamental backing, and little in the way of a competitive moat, we are not optimistic on this stock’s prospects in the long-term. In the short-term, the stock still has high short interest and a concentrated investor base (top 5 investors hold about 40% of the shares), so the squeeze potential still exists. The 3 month low around $75 is the downside level to watch, while I’d be surprised if the stock breached $90-91 on the upside.
I am very much in this camp, and frankly I have no idea what sort of results and guidance the company will issue tonight, but I will tell you that the stock’s loss of momentum since failing to breakout meaningfully above $100 back in September, and the subsequent 20% drop makes me more inclined to play from the short side than the long side regardless of its 24% short interest. I would also mention that smaller competitor TRLA is down 27% from its recent all time highs, possibly suggesting that the fever has broken.
Trying to short these high-fliers has been a fools errand and we have done our best to avoid doing it, but maybe the near term momentum shift is signalling tougher trading ahead. I would not SHORT any of these stocks, but I like the idea of finding defined risk options trades that give me a better than avg risk reward in the event of a breakdown. I AM DEFINITELY PUTTING THIS TRADE IN THE ADULT SWIM CATEGORY, RISKING WHAT I AM WILLING TO LOSE.
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.
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Original Post By Enis: $Z Q3 Earnings Cheat Sheet
Event: Z reports its Q3 earnings today after the close. The options market is implying about a 10.5% one day move, which is slightly below the 4 qtr avg of about 11%, but above the 8 qtr avg of about 9.5%.
Sentiment: Wall Street analysts are not positive on the stock, with only 5 buys, 7 holds, and 2 sells, and an average 12 month price target of around $91. Short interest remains around 25% of the float, even though the stock’s year-to-date change is +193%. The short interest has declined for much of 2013, but it is still close to where it was a year ago, when the stock traded at less than half its current price:
Options Open Interest: Open interest is slightly skewed towards puts vs. calls by a ratio of about 1.1 to 1. However, recent activity has favored calls, with the 1 month average volume about 1.25 to 1 in favor of calls trading. The Nov15th 100 calls and Nov15th 85 puts both have over 2k of open interest.
Price Action / Technicals: Zillow IPO’ed in July 2011, and promptly sold off from its $60 high on IPO day. That $60 level served as resistance earlier in 2013, but once it broke, the stock was off to the races:
Zooming in to the last 6 months, the stock’s earnings gap on August 1st has not been filled, and that’s the area to watch on the downside ($73-$75):
The stock has a good chunk of resistance in the $90-$100 area on the upside, where late-comers to the party are likely to be sellers. In short, shorts are likely buyers 10% lower, and Johnny-come-latelys are likely sellers 10% higher.
Volatility: Zillow’s implied volatility heading in to the earnings event is near the low end compared to the past 4 earnings events, mainly due to the low recent realized volatility:
The stock has also fallen back into a technical range, as opposed to its breakout situation prior to last earnings, making a large move less likely according to options traders.
Our View: Dan wrote extensively about Zillow in his Name That Trade post about 2 months ago, succinctly summarizing his thoughts on the company:
My quick take is there is nothing particularity special about this company, they have lots of competition in the online home sale space from the likes of Trulia, Realtor.com and Redfin. While the company is seeing pretty impressive sales growth, expected to grow 40% a year for the next 2 years (it is rapidly decelerating), they have seen the costs of acquiring those sales to go up to almost 50% of revenue. Aside from the user-interface this is a fairly low tech business from what I can tell. The company relies a great deal on human sales people calling human listing agents to get their fees, not sure paying north of 20x those sales makes sense for a business that resource intensive that lacks scale.
Not much has changed since he wrote that, but the stock is down 20%, another indication of how quickly sentiment can change in these high fliers. Without any strong fundamental backing, and little in the way of a competitive moat, we are not optimistic on this stock’s prospects in the long-term. In the short-term, the stock still has high short interest and a concentrated investor base (top 5 investors hold about 40% of the shares), so the squeeze potential still exists. The 3 month low around $75 is the downside level to watch, while I’d be surprised if the stock breached $90-91 on the upside.