Zillow Group, Inc. (NASDAQ:Z) reported earnings last night and the stock fell 7% on the headline. Management reported an inline quarter but investors did not like the second-quarter guidance. And therein lies part of the opportunity today.
Of late, the entire stock market is on edge from a slew of headlines that loom above investors’ heads. So it’s only natural that we find management teams being cautious with their guidance. It is better for them to under-promising now so they can over-deliver in a few months.
I consider today’s trade as speculative in a conservative portfolio. Z is a momentum stock so it moves fast in either direction. In addition, it still runs at a loss — which widened this quarter — so there’s definitely reason to worry. Nevertheless, the same opportunity that existed a few months ago for the stock still remain intact.
Even in a rising-rate environment, Z stock has first-mover advantage. So they can cultivate their relationship with the real estate professionals to maximize their opportunities. As long as management continues to execute without major debacles, I believe the stock will recover from this earnings malaise through 2018 and beyond.
Given that there are reasons to worry, I am not buying the shares outright and risking my money without any room for error. Instead I will use Zillow options where I can be bullish to stock without any money out of pocket at this time. So in essence I am building a moat around my risk just in case the current headlines that are holding the macroeconomic bullish thesis win.
Luckily for Z stock investors, it came into the earnings event up 30% year-to-date, so even with a few days of selling the upside momentum should remain intact. Nevertheless there are levels to heed in the stock.
The last six trading days for Z have been insane resulting in an 18% rally off of the bounce on $46 per share. So a partial retracement is due and should not worry the bulls too much. Sharp spikes often give back some while leaving the overall direction bullish. This is another reason why I prefer using options to trade violent stocks like Zillow.
$47 per share is a technical pivot for the stock that dates back to last June. In March of this year the bulls prevailed and have since successfully retested it as support just recently. Should it eventually fail, there is a similar level around $42 per share that dates back even further to August of 2016. So technically Z stock has plenty of support below to withstand several bearish pushes lower should the selling persist.
Analysts on Wall Street are almost unanimously on hold with Zillow. This reduces the chances of surprise downgrades. Nevertheless, after this disappointing earnings report, we may have a few experts lower their rating or price targets.
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Z Stock Trade Idea
The Bet: Sell the Z NOV $40 put. This is a bullish trade for which I collect $1.25 to open. I have a 85% certitude that I will retain maximum gains. But if the price falls below my strike then I own shares. I would then need to manage off my breakeven point of $38.75.
Selling naked puts carries big risk, especially for a stock as frothy as Zillow. For those who want to mitigate it, they can sell a spread instead.
The Alternate Bet: Sell the Z stock NOV $40/$35 bull put spread, which has about the same odds of winning and would yield 15% on risk. Compare this with risking $56 per share here and without any room for error while expecting a rally for profit.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.
