Right out of the gate yesterday morning, at least one investor expressed bearishness and bought put options in Expedia (NASDAQ: EXPE) a couple weeks before the Internet travel company is scheduled to release its second-quarter earnings figures.
The investor bought approximately 15,000 Aug. 15 puts for around 90 cents per contract with the stock trading up 65 cents to around $16.50 a share. These puts closed Tuesday night at 88 cents. The investor needs EXPE shares to expire lower than $14.10 (the strike price minus the premium paid) come August expiration to make money on this trade, or they need the stock to drop enough prior to expiration so that they can sell out of the puts at a profit.
The fact that these puts are trading higher along with the stock tells us that it is likely a buyer driving the volume, and that implied volatility is higher. Tuesday night the implied volatility was roughly 62 with the stock trading at $15.82 a share. But yesterday’s trades were closer to an implied volatility of 72. Normal daily options volume across all strikes in EXPE is approximately 2,500 contracts compared to the 23,000 options that changed hands during the first two hours of trading yesterday – the majority of that volume accumulated in these Aug. 15 puts.
EXPE did not announce any significant news that catalyzed the heavy put buying we saw this morning. It quite possibly could be an investor using the pop in the market as a chance to protect some profits. EXPE shares have rallied more than 158% since their closing low for the year of $6.39 on March 9. Analysts expect the company to report a 10-cent increase in earnings per share to 31 cents a share later this month.
Investors should not interpret heavy put buying as a reason to automatically sell EXPE shares. Bearish options activity could be a chance for long investors to take some profits before the company releases its second-quarter earnings report on July 30. For bullish investors it presents a chance to sell premium if they believe the stock will finish above $14.10 at August expiration - that would be a return greater than 6% for 38 days of risk.
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