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This Stock Is Following a Familiar Pattern

This Stock Is Following a Familiar Pattern

TRIP logo

Source: Trip Advisor.com


Some companies have familiar patterns. The company could follow a boom and bust pattern, for example, delivering great results followed by disappointing results. Others might be slow but steady, a powerful combination for long term investors.

TripAdvisor Inc. (Nasdaq: TRIP) ended up on the list of the day’s biggest gainers after reporting better than expected earnings. That’s actually a pattern the company follows, delivering great numbers and making a big price move.

TripAdvisor owns and operates a portfolio of online travel brands. TripAdvisor, the company’s brand, is a travel site. The platform is available in 48 markets and 28 languages around the world.

The Hotel segment includes click-based advertising and transaction; display-based and subscription-based advertising, and other hotel operations. The Non-Hotel segment includes Attractions, Restaurants and Vacation Rentals businesses.

TripAdvisor’s platform also enables users to compare real-time pricing and availability for these experiences, as well as to book hotels, flights, cruises, vacation rentals, tours, activities and attractions, and restaurants, on either a TripAdvisor site or application, or a travel partner site or application.

Good News for the Quarter

TripAdvisor reported quarterly results that were better than expected. Revenue rose 2%, beating expectations for a decline of 3%. Earnings per share of $0.30 nearly doubled expectations which had been for $0.16 per share.

CEO Steve Kaufer noted, “We had a strong start to 2018. Our hotel results were ahead of our expectations, and we delivered accelerated non-hotel revenue growth.” The company also raised its guidance for the year and now expects some operating earnings growth, up from previous forecasts for flat performance.

Analysts had mixed opinions on the news.

Jefferies analyst Brent Thill kept his underperform rating and $27 price target intact, arguing that TripAdvisor’s beat was “driven by foreign exchange, not fundamentals.” Thill said that the company saw strong performance in its non-hotel segment but he thinks TripAdvisor “would have a hard time executing a full turnaround within one year.”

Piper Jaffray’s Michael Olson raised his price target by two dollars, to $49, but maintained his neutral rating. “We continue to have confidence in the company’s ability to better monetize its user base longer-term,” he wrote.

The turnaround in operations could be good news for long suffering share holders.

TRIP chart

The stock has been in a protracted down trend but follows a pattern of making large moves after earnings and then consolidating for weeks, until more news is announced.

The daily chart shows the importance of the up move.

TRIP daily chart

The stock is now above resistance that dates back to last September. Breaking above this level could set the stock up for additional gains from a technical perspective.

From a fundamental perspective, the stock should be supported by a previously announced share buyback program. The company authorized a $300 million share repurchase program but has only executed $100 million of that plan. The balance sheet is strong and additional buy backs are likely.

With this support, it is likely TRIP will continue with that pattern and push slightly higher or consolidate recent gains for at least a few weeks.

That means a put selling strategy could generate low risk income in the stock.

Trading the Trend

When a stock is expected to move higher, traders could consider obtaining long exposure to the stock to profit. A number of options strategies could be used to meet this objective.

Among those strategies is a bull put spread that could be used. The risk and reward diagram is shown below and it offers limited risk with limited potential gains. However, it is well suited for a stock which is in an up trend.

bull put spread

Source: The Options Industry Council

This strategy involves two put options. One put option is bought and a second put option with the same expiration date but with a lower exercise price is sold. Selling the put option will generate immediate income, just like the more familiar Covered Call Strategies would. But, unlike a covered call, risk is limited.

Many traders will be familiar with the idea of a covered call. This is a conservative strategy many long term investors use to generate income in stocks they own that are unlikely to make large moves.

Although the bull put spread is different than a covered call, the bull put spread strategy meets the same objective as the covered call which is to generate some income. This trade generates immediate income and carries limited risk.

A Specific Trade for TRIP

For TRIP, a bull put spread could be opened with the June 15 put options. This trade can be opened by selling the June 15 $42 put option for about $0.50 and buying the June 15 $41 put for about $0.20.

This trade would result in a credit of $0.30, or $30 per contract since each contract covers 100 shares. That amount is also the maximum potential gain of the trade.

The maximum possible risk is the difference between the exercise prices of the two options less the premium received. For this trade, the difference between exercise prices is $1 ($42 – $41). This is multiplied by 100 since each contract covers 100 shares.

Subtracting the premium from that difference means, in dollar terms, the total risk on the trade is then $70 ($100 – $30).

The potential gain is about 43% of the amount of capital risked. This trade will be for about two weeks and the annualized rate of return provides a significant gain.

The bull put spread in TRIP is an example of how options are a versatile tool and could meet many of your trading objectives. In this trade, options provide income and defined risk that could be lower than owning the stock. This strategy also has a high probability of success.

These are the type of strategies that are explained and used in TradingTips.com’s Options Insider service. To learn more about how options can be used to meet your goals, click here for details on Options Insider.