Don't Get Tripped by TRIP

10/23/2012 7:00 am EST

Focus: OPTIONS

The accidental early release of what turned out to be disappointing earnings for Google triggered an 11% drop in its stock price before trading was halted. Terri Stridsberg of Schaeffer’s Investment Research, details an ambush by short-term put players on a stock set to report next week.

TripAdvisor, Inc. (TRIP) extended Thursday's trek lower Friday, which was triggered by sector peer Travelzoo Inc.'s (TZOO) warning of a sharp drop in third-quarter earnings. As a result, bearish traders have been piling on TRIP, with approximately 29,000 puts changing hands so far. This is 42 times the equity's anticipated intraday put volume, and more than 10 times the number of calls traded.

The clear front-runner has been the November 27 strike, where close to 18,300 puts have been exchanged. Two large blocks of these puts crossed at an ask price of $1.20 each, confirming they were bought. Since implied volatility last seen more than 15 percentage points higher—along with the fact that this strike currently holds open interest of just six contracts—it can be inferred that new bearish bets are being established here. In order for Friday's put buyers to realize a profit from these out-of-the-money puts, the stock must retreat below $25.80 (strike price less the premium paid) by the time November options expire.

Relatively speaking, those put buyers are paying a hefty premium to bet bearishly on TRIP. The stock's Schaeffer's Volatility Index (SVI) has shot higher in recent sessions, and now stands at 64%--higher than 76% of all other readings of the past year. In other words, TRIP's short-term options are rather pricey at the moment.

In contrast to what was reported a few weeks ago, this interest in puts over calls has become part of TRIP's broader trend. In fact, the 50-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio now sits at 2.64, confirming puts bought to open have more than doubled calls during the past few months. Likewise, the security's Schaeffer's put/call open interest ratio (SOIR) has risen to 1.13, meaning puts outweigh calls among the front three-months' series of options.

Another sign of this pessimistic attitude toward TRIP is the fact that short interest has climbed by more than 3% during the most recent reporting period, and now accounts for 16% of the equity's available float. It would take about 16 days to unwind these bearish bets, at the stock's average daily trading volume.

Meanwhile, most of the analysts covering the travel & tourism Web site still maintain a cautious outlook toward TRIP. Only four have bestowed a "buy" or better recommendation upon the security, versus 11 "holds" and one "sell" rating.

TRIP has put forth a commendable performance in 2012, having gained about 17% so far this year. However, the stock has trailed the broader S&P 500 Index (SPX) by roughly 19 percentage points during the past three months. On the charts, the security is trading well below its 10-day moving average, which has served primarily as resistance since mid-September.

TRIP is on deck to report third-quarter earnings after the market closes on Oct. 30, and analysts are projecting a profit of 42 cents per share. However, the company has missed the consensus view in two of the past three quarters. Should the stock fall short of this forecast, it could result in another post-earnings decline, and thus reward Friday's November bears.

By Terri Stridsberg of Schaeffer’s Investment Research

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