Two weeks ago we placed a trade in the Chinese online travel site CTRP. The trade itself was a simple put purchase, close to the money. The idea at the time was to look to spread on weakness before its impending earnings event. That event is today after the bell. We initially saw weakness in the stock but decided to hold out on spreading. In hindsight that was a mistake as the trade is now about even, and naked, into the event. We have 2 options here. We can close the trade for close to a wash or we can spread. Spreading would likely have to be a sale of the March 42 puts at around 65c. That’s helps alleviate some risk but it doesn;t leave us with a great risk/reward with more than a dollar at risk to make less than two.
So Since we have no actual feel for the event itself we have risk of losing it all overnight on a breakout above the recent range. So we’re going to take a small loss and close. Obviously, we could regret this tomorrow but we want to be disciplined here:
ACTION – Sold to close the CTRP (45.50) March 45 puts at 1.85 for a 10c loss
Event?: The Chinese online travel company Ctrip.com (CTRP) has yet to report Q4 results. Bloomberg estimates March 13th. A look a their investor relations site (here) is little help, but considering they reported their Q3 on Nov 25th it should be soon.
Price Action /Technicals: The stock’s chart caught my eye as it has traded in a 10% range so far in 2015, now back at the low end, and once again sitting on important support:
The stock’s 35% decline from the 52 week highs in September is also worth noting, which includes an 8.5% one day decline following their disappointing Q4 outlook in late November.
On a longer term basis, the three year chart shows a pattern that should be very familiar to regular readers, the Triangle of Death, with $40 serving as MASSIVE technical support:
A break below $40 on volume and this thing could be lights out with little support until we get to the low $30s.
Fundamentals: Earnings saw a massive down-tick in 2014, from 1.57 to the expected .68, but analysts expect a rebound to .84 in 2015, up 24% as gross margins are expected to decline to about 71% from 75% a couple years ago. What stands out though is the fact that sales have grown 33% a year for the last 2 years and analyst expect 30% sales growth for the next two years.
Given intensifying competition from the likes of Alibaba, and others, CTRP has entered what many analyst expect to be a protracted period of investment that will hurt profitability. What seems fairly clear is that new competitors are competing on price as they attempt to whittle away at CTRP’s market share at a time when Chinese Airlines are cutting commission rates.
Valuation: The stock is clearly not cheap at 54x expected 2015 earnings and almost 4x expected sales, nearing the upper bands of its historical levels.
Open Interest: Options trade on the stock with total open interest of 156,000 contracts with 90,000 calls and 66,000 puts, with the largest strikes of open interest 25,000 June 60 calls, 15,000 June 50 calls, and 9,000 Sept 50 calls.
Implied Vol: Given the lack of clarity on the earnings date, 30 day at the money implied vol looks fair, almost at the mid point from the 52 week highs and the 52 week lows. I would note that the spread between realized vol (how much the stock is actually moving) to implied is the widest it has been since the November earnings guide which suggests that options prices are expensive given the uncertainty:
So what to do? As stated above, options prices ain’t exactly cheap, the identifiable catalyst ain’t exactly identifiable, and making a directional trade on a stock like this at an inflection point could be kind of binary. Given the poor sentiment, and oversold condition the stock could be a hard press down 35% from the 52 week highs, but if the company were to guide down I suspect we could see a quick break of $40 on the downside.
SO the trade below should be deemed as speculative, risking what I am willing to lose, which means in small size.
Trade: CTRP ($45.99) Bought March 45 puts for 1.95
Break-even on March Expiration:
Profits: below $43.05, down 6%
Losses: up to 1.95 between 43.05 and 45, max loss of 1.95 above $45
Rationale: One would only do a trade like this if they thought there was a strong chance of greater than expected move to the downside on a downgrade of guidance. We considered looking out to April expiration to ensure that we would catch earnings, but the distance between their last earnings on Nov 25th suggests it should come in then next two weeks.
As always with event trades you need to get a lot of things right to merely break-even, direction, timing and magnitude of the move, which places this trade in the low probability event category as we don’t even know when earnings will be released.