by John Kmiecik | November 29, 2012 8:23 am
Around the holidays, people generally don’t think about taking vacations — and if you are, it’s usually to see family and friends; not that long-overdue “get away from it all” trip you really need.
This trade idea focuses on a company that can help you with your travel plans this holiday season, whether it’s for family time or a real vacation — and it might just be able to do something about your portfolio, too!
Expedia (NASDAQ:EXPE) owns and operates several websites worldwide that are, for the most part, dedicated to travel services. Although Priceline (NASDAQ:PCLN) is considered the leader in the industry, EXPE still is well-established in its own right.
Like many products and services over the last decade or so, web-based has been the preferred method of shopping including travel services. This has been even more evident as of late, as Expedia’s third-quarter results would indicate. Q3 revenues were up 17% on the year, and gross bookings rose 19% thanks to exceptionally strong international bookings.
Click to Enlarge Technically, EXPE has been climbing higher in a nice uptrend for a good year with a few pullbacks tossed in here and there. Shares have gone from about $26 to its current price around $62 — an all-time high.
Being that there are no previous higher prices that could act as resistance, the stock might just be able to continue to climb higher.
Example: Buy 100 shares of EXPE @ $61.73 and sell the January 65 call @ $1.60.
Cost of the stock: 100 X 61.73 = $6,173 debit.
Premium received: 100 X 1.60 = $160 credit.
Maximum profit: $487 — that’s $327 (65 – 61.73 X 100) from the stock and $160 from the premium received if EXPE finishes at or above $65 @ January expiration.
Breakeven: If EXPE finishes at $60.13 (61.73 – 1.60) @ January expiration.
Maximum loss: $6,013 which occurs in the unlikely event that EXPE goes to $0 @ January expiration.
The maximum profit potential for this covered call strategy is for EXPE to just rise up to the sold call’s strike price ($65) by January expiration. The stock moves up the maximum amount without being called away because of the short strike and profits are enjoyed on the shares and the option premium. The process can be duplicated for the next expiration if so desired using either the same 65 strike if the outlook on the stock is neutral, or a higher strike if the outlook continues to be bullish.
If EXPE continues to make new 52-week highs and moves past the $65 strike well before January expiration — which is a possibility with more than 50 days left until expiration — the call option can be bought back and a higher strike can be sold against the position to avoid assignment. This will allow the stock to remain in the portfolio and also give the position a chance to increase its return, especially if stock moves higher.
The breakeven point of this trade ($60.13) is situated right at a previous level that acted as resistance in the past and should now act as support for the stock in the future. If the upward trend doesn’t continue and Expedia drops in price more than was anticipated and below its new support, it might make sense to close out the entire trade (stock and short call) to avoid further losses.
As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities.
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