Shanghai-based online travel specialist Ctrip.com (CTRP) is set to report next Monday evening. And if consensus views and recent comments by analysts and market pundits are right, shares of CTRP are readying to fly higher.
Over the past three years, Ctrip has managed to match or beat Street views on every single occasion at the quarterly corporate confessional. And over the last four quarters, Ctrip has delivered an average upside surprise of roughly 20%.
At the same time, Ctrip’s streak of 10 straight profitable quarters has taken a turn, becoming losses for the last two reporting periods. But that didn’t stop investors from deciding to ride CTRP stock higher with earnings-fueled gains of 8.84% and 24.79% immediately following those releases.
Looking to Monday evening’s report, the forecast is for Ctrip to announce a profit of 1 cent per share. That compares to the year-ago profit of 14 cents. However, revenues are expected to move up by 46% sequentially to $407 million.
Analysts and bloggers of late have been, by and large, very bullish on Ctrip. Analyst firms maintain a “strong buy” and an average 12-month price target of $90 for CTRP shares.
And last week, Macquarie Research came out with a bullish nod for CTRP. The analyst’s optimism was based on the country’s “wealthier middle class” and expectations that China’s online travel market can grow by 27% annualized through 2018 — something that Ctrip obviously is in position to leverage.
CTRP Charts
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For growth stocks like Ctrip, the percent decline fits in nicely with run-of-the-mill (but necessary) periods of backing and filling of 20% to 30%.
Fibonacci levels have come into play as technical support, too, and there’s a bullish gap fill sandwiched between the 50% and 62% levels, which were calculated from two key pivot lows back in March.
Now let’s take a look at that other important chart, which shows what other traders have been up to in Ctrip.
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But prior to Ctrip stock’s skyward gains, shares also went south by -8.48% and did sit on the tarmac with very tepid losses of -0.48% and 0.83% last August and in May 2014.
If we look at the percent magnitude of each reaction in Ctrip stock by stripping out the directional bias, we find the average close-to-close is 8.68% with one standard deviation of wiggle room of 9.85%.
Examining Ctrip’s provided volatility chart, we can see implieds are well-bid and right near the highs associated with recent earnings events. The differential between option premiums and underlying stock volatility all but ensures a volatility crush following the report.
While implieds will invariably move lower next Tuesday, Ctrip option traders are currently pricing in a 68% chance that CTRP could go as high as $83 or as low as $58 by August expiration based on 23 calendar days and 71% implieds.
Said another way, Ctrip is priced to go up or down by nearly 18% as traders brace for one of the stock’s more volatile reactions, despite its mixed price moves historically.
CTRP Trade Idea
Given the current pricing, bullish traders should consider the Aug $72.50/$75 bull call spread for up to $1.25.
The max return of 100% for this Ctrip spread requires a move of just more than 6% to achieve that profit at expiration. That’s two-thirds less than the trading range extremes being priced in by options traders, and a solid reason in favor of this spread.
Additionally, as the high implieds in Ctrip will invariably give way to a volatility crush, by selling a call contract against the long contract, the trader vastly reduces his or her exposure to that risk, while making use of it at the same time.
And as breakevens on an outright Ctrip Aug $72.50 call and $75 call purchase are about $76.70 and $78.20, compared to $73.75 for the vertical spread, that’s a nice package deal for an anticipated flight north.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
