Trade Summary: September 22, 2014

September 22, 2014

 

 Trade Rationale

One of the recent developments over the last few trading periods has been investors’ exit from Internet and Social Media stocks. Several names across the industry have lost ground to more traditional names and industries.

Some believe it could be due to the highly successful IPO of Alibaba (BABA), which became available for trading on Friday. Either investors are selling other Internet stocks to buy BABA, or perhaps they are selling those same stocks to capture profits because they believe a top has been hit.

Or, it could just be a general “risk off” move among investors. Equities have done very well the last few weeks, so it’s not unusual for market watchers to call for a near-term top. Regardless, there’s a definite short-term trend, and it’s providing us with a good trading opportunity.

In this case, we’re going to bet on two companies turning it around after enduring heavy selling. And, we’re going to take a bearish position on another stock which could have farther to fall.

First off, we’re buying calls on Yahoo (YHOO). The Internet mainstay has taken it on the chin after selling some of its stake in BABA. The funny thing is, YHOO’s remaining stake in BABA, plus its stake in Yahoo Japan, are worth more combined than the company’s current market cap! That’s crazy, and it won’t hold.

Next, we’re going to grab calls on Travelzoo (TZOO). TZOO has had a tough year, down 25% year-to-date. There’s certainly a lot of competition in the travel/entertainment website space. However, despite the issues, the company still has strong fundamentals, including a hefty amount of cash. We’re predicting a turnaround.

Finally, let’s take an opposite position on local review site, Yelp (YELP). Yelp gets a lot of positive press, but the company is trading at an extremely high valuation and is starting to see little problems crop up. The stock has lost some ground in the recent Internet selloff. In this case, we believe the selling will continue.

Keep reading for the details of each trade.

 

Trade Details

#1) Buy Yahoo (YHOO) November 39 Calls up to $2.50

We’re looking for a rebound in YHOO. Our first profit point for conservative traders is at $42. For aggressive traders, you can hold up to $44. For risk control, the conservative exit level is $35. $32 is the final exit level for aggressive traders.

#2) Buy Travelzoo (TZOO) December 17.50 Calls up to $0.90

Like YHOO, we want TZOO to go higher. Our first exit point for conservative traders is at $18. For aggressive traders, you can hold to $20. For risk control, the conservative exit level is $15. And, $13 is the final exit level for aggressive traders.

#3) Buy Yelp (YELP) November 62.50 Puts up to $2.65

Finally, we’re looking for a down move in YELP. Our first profit-taking exit point for conservative traders is at $62.50. For aggressive traders, you can hold down to $59. For risk control, the conservative exit level is $80. $85 is the final exit point for aggressive traders.

 

Category: AOA Trade Summary