At this point, regular readers are familiar with our views on these Web 2.0 services stocks that trade at multiples of sales that they can never ever grow into. We have noted on more than one occasion that Zillow has shown remarkable relative strength relative to many peers despite sporting similar valuation concerns. The stock recently made a new all time higher after its brief sell off in late March early April. The company reports Q1 earnings tomorrow after the bell, and the options market is implying about a 12% one day move on Thursday which is well in advance of the 4 qtr avg of about 5.25%. The take-away, options prices are very expensive heading into the print and those looking to make directional bets with long premium will find it hard to make money.
But I am going to keep this short and simple, I obviously have no idea what sort of results and guidance they will give tomorrow after the close, but if there is a hint of less than stellar news this stock could give back all of that relative out-performance and then some. To be frank the stock acts like someone knows something, so you would have to be crazy to short the stock, but I will look to create a short biased trade structure where I define my risk and target potential pull back levels.
The one year chart below shows $100 as a very near term support level with little support until $90, where it was trading just last week, and then $80 as a fairly important longer term support level (green line):
So what’s the trade?:
In an effort to reduce my premium outlay to make a directional bet into Zillow’s Q1 print I am going to use a put butterfly so that I can be selling some fairly meaty options at my desired near term target. As many readers have heard us say before, directional bets with expensive options are risky, you need to get a lot of things right, direction, duration and magnitude, not to mention crossing bid ask on the way in and out on a multi-leg trade like this, so you really should only risk what you are willing to lose on an event trade. I am going to follow my own advice and trade this small.
Trade: Z ($105) Bought to open May 100/80/60 Put Fly for 3.50
-Bought 1 May 100 Put for 4.90
-Sold 2 May 80 Puts at .77 each or 1.54 total
-Bought 1 May 60 Put for .14
Break-Even on May Expiration:
Profits: btwn 96.50 and 63.50 make up to 16.50 with max gain at 80 of 16.50
Losses: btwn 60 & 63.50 and 96.50 and 100 lose up to 3.50 with max loss of 3.50 below 60 and above 100