Trade Idea in Zillow ( Z)

Zillow (Z) closed Tuesday at $41.45. The stock  has been a darling stock since it went public in 2011. The last week it has been a stock folks are avoiding like the plague. Citron Research issued a critical report questioning its meteoric stock rise and future business prospects. Interestingly, Citron is a short seller’s research firm.

Today, Tuesday, October 35 and 40 strike puts were very active on total put volume of 10,000 contracts. Option Volatilities are higher than normal. The stock closed at $46.32 last Thursday and today is trading at $41.45 (low today is $40.56). Down 10% in 3 three trading days!

Trade – I’m a bit leery of a short selling firm putting out a bad report. Zillow was high and a pullback is understandable. Not sure I want to jump on the bearish bandwagon after the stock is down 10% in 3 days. I’m thinking it could go a little lower before bouncing a a bit higher.

Looking for a range of maybe $38 – $46 over next 3 weeks and the option volatility to decrease a bit.

$38-$46 range over next 3 weeks? Consider an Iron Condor. Sell 1 October 45 call and Buy 1 October 50 strike call. The second half of the trade is to Sell 1 October 40 put and Buy 1 October 35 strike put for a total credit of $2.10. (Not including commissions, the Risk is the difference in strike prices – 5 points – less the $2.10 credit or $2.90).

But what if you think Zillow might not hold $38 on the downside and could be headed towards the $32-$38 Range over next 3 weeks? I’m looking at a Directional Butterfly. Buy 1 October 40 put, Sell 2 October 35 puts and Buy 1 October 30 strike put. Total Debit of $0.85 ($85 total outlay and risk for 1-2-1, you would be long two puts and short two puts). At $35 this butterfly would be worth $5, Breakevens are $39.15 and $30.85 – that’s a nice-sized landing area! Could get this spread cheaper on a bounce up if we get one.

 

Dan Sheridan 

dan@sheridanmentoring.com