Event: Chinese online travel company CTrip (CTRP) reports Q4 results tonight after the close. The options market is implying about an 11% post earnings move, which is shy of its 4 qtr average post earnings move of about 15%. I would add that all 4 of the last moves have been higher, with the smallest of about 9% and the largest of about 25%.
Price Action / Technicals: CTRP is down about 12% on the year, and down about 28% from its 52 week and all time high made last November.
The technical set up is fairly interesting, with the stock’s recent consolidation in and around $40 which was a breakout level to new all time highs in late October, also right around its 200 day moving average (yellow):[caption id="attachment_62230" align="aligncenter" width="600"] CTRP 1yr chart from Bloomberg[/caption]
Near term support exists just above $35 at the February low. The mid $30s is consistent with the uptrend that has been in place since mid 2013:[caption id="attachment_62231" align="aligncenter" width="600"] CTRP 5yr chart from Bloomberg[/caption]
Fundamentals: the massive gap higher in October was the result of the announcement that CTRP and Chinese search giant Baidu (BIDU) entered into an agreement for a share swap for their Qunar (QUNR) travel division, where CTRP would now control nearly 75% of online travel in mainland China. Analysts loved the deal as BIDU would own 25% of the CTRP, and CTRP would have a 45% voting interest in QUNR, and much better align CTRP’s interest with that of BIDU. The deal is not a merger but its seems that CTRP is entering a strategic partnership to take out competition, create a near monopoly on a very fast growing part of Chinese eCommerce. The cynic in me would suggest that there is some fairly odd financial engineering going on here, but CTRP’s revenue growth is undeniable in the mid 30s % for the last three years, expected to accelerate meaningfully in 2016.
My View: tonight’s report is likely to be fairly confusing as it will be the first that consolidates the results of both companies, despite remaining as separate operating entities. I suspect that commentary around macro environment will be of particular focus of investors, coupled with any potential adverse affects of push-back from airlines who may be boycotting the combined entities services due to fears of pricing pressures. On the flip-side any commentary of increased operating margins due to the economies of scale could cause a fairly dramatic short squeeze in the shares given the stock’s sharp pullback since the highs in November.
What’s the trade?
If you were inclined to play for a rally in line with the implied move, with the stock $41.50, in the money call flies expiring this Friday could be a decent way to define risk and mitigate a post earnings vol crush:
March 40/46/52 call butterfly is offered at about $1.70
- Buying 1 March 40 call for $3.20
- Selling 2 March 46 calls at 75 cents each or $1.50 total and
- Buying 1 March 52 call for 10 cents
Break-even a On Friday’s Close:
Profits: between $41.70 and $50.70 with max gain of 4.30 at $46,
Losses: up to 1.70 between $40 and $41.70 & between $50.30 and $52, with max loss of $1.70 below $40 and above $52
Rationale: As always with long premium directional trades into potentially volatile events, there are a lot of things you need to get right to just make money, namely direction and magnitude of the move.
This trade idea risks 4% of the underlying stock price, not an insignificant sum, but much better than the amount that would be at risk on a move lower in the stock inline with its implied move (11%).
Another trade we like in these situations are calendars. Similar disclosure as the above, as it is long premium, but less risk and less reward.
For instance with the stock at $41.50, you could buy:
March 46 / April 46 call calendar for 50 cents
- Sell 1 March 46 call at 75 cents
- Buy 1 April 46 call for 1.25
Break-Even on Friday’s close:
Best case is for the stock to move to your strikes, the short call will have lost most of its value, while the April will have lost value from options prices coming in, but will have picked up deltas with the stock’s increase.
Both of these trades are ways to play for a move higher on earnings while defining risk in case of a big move lower. These sorts of stock alternatives have downside in other ways as you can get the magnitude of the move wrong on a huge move higher and actually lose money while having the direction correct. But that is less likely than the combination of a smaller move higher, a small move lower, or a big move lower, in which case the stock alternative performs like stock to the upside and better than stock to the downside.