New Trade $Z: Zillow Talk

by Enis December 16, 2013 11:57 am • Commentary

On December 4th we closed a bearish put fly (expiring in December) in Zillow for a double. Here was that trade:

ACTION – Sold to close the Z ($71.65) Dec 80/65/50 put butterfly at 7.20 for a 3.60 profit

Original Trade:

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

The stock is up about 6 dollars since closing that December structure. At the time we liked taking the profits in the trade because the stock was near its 200 day moving average. Following the bounce off of those lows, the stock is now nearly back to its 50 day moving average.  The stock has had a hard time breaking above its 50 day ma since the stock’s fall from its highs above 100 in September. Here’s how that looks on the chart with the 50 day in red and the 200 day in blue:

Screen Shot 2013-12-16 at 9.16.58 AM
6 month chart from LiveVol Pro

Z almost tagged its 50 day moving average today due to favorable news from a Raymond James survey of those shopping for homes (courtesy of Bloomberg):  

Zillow Tops Trulia as Brand Leader: Raymond James Survey  11:32
Zillow emerging as real estate brand leader, with 72% of respondents to Raymond James 4Q Internet consumer survey aware of Z, 67% aware, 43% aware of Trulia, Aaron Kessler writes in note.
• When asked where they start conducting research online when buying a home, 30% indicated Z,, 22% real estate broker websites, 8% TRLA
• Z may be benefiting from increased 2013 advertising
• Z up as much as 4.2% to highest intraday since Nov. 29; TRLA down as much as 4%

While that’s a nice reason for a short-term pop, we are still of the view that Zillow’s price action has been dictated by the technicals rather than the fundamentals.  This company trades at around 80x its 2015 EPS, a sign that the market has little idea of its fundamental value.  We want to take advantage of this bounce near the 50 day moving average and re-enter this name from the short side with a similar structure that is farther out but slightly less ambitious with its centering. Here’s the new trade:

TRADE – Z (77.00) Bought the Jan10th 79/71/63 put Fly for $2.21

– Bought 1 Jan10th 79 put for 4.97

– Sold 2 Jan10th 71 puts at 1.56 each, or 3.12 total

– Bought 1 Jan10th 63 put for 0.36

Break-Even on January 10th, 2014 Expiration: 

Profits: Between 65.21 and 76.79, make up to $5.79, with max profit of $5.79 at 71

Losses: Up to $2.21 between 63 and 65.21, and between 76.79 and 79, with max loss of $2.21 below 63 and above 79.

Trade Rationale:

Z has failed repeatedly to break though its 50 day moving average since it topped out in September. The stock has made lower lows and lower highs during that decline. This structure plays for that failure at the 50 day with a sweet spot near its 200 day moving average which should serve as at least temporary support.