Last night, Booking Holdings (NASDAQ:BKNG) pushed back its earnings release. And this morning, investors are lashing out at it. The stock fell as much as 8% on the earnings report headline.
Even though management beat profit metrics and second-quarter net income rose 40% year-over-year, they failed to wow investors with their guidance.
This year, Wall Street wants to see better-than-expected guidance in order to react positively to earnings headlines. In this case, BKNG management (formerly PCLN) did not deliver on this. But cautious guidance is not a reason to throw this stock away for long.
Fundamentally, a dip in the stock is not necessarily an indicator of a dip in the business itself. In this case, Booking is not expensive given the growth that it delivers. The stock trades at a 26 price-to-earnings ratio, which is definitely not bloated. So owning shares — especially at a even deeper discount from this morning’s dip — is not likely to be a financial mistake in this macroeconomic environment.
We are still in a global economic expansion supported by favorable Central Bank policies. So people will continue to spend on travel and BKNG stock should have many months of upside still to come.
This is definitely a momentum stock, so it moves long and fast. Consequently I will use long-dated options to trade it. Coming into the earnings report, Booking stock range was tight so this move alleviates most of that built-up pressure.
This may not be an exact bottom, but since I’m using options, I can build a big enough buffer against the current price to be more comfortable. Compare that with risking $1,900 per share to buy the stock outright then hope for a rally in order to profit.
This morning’s dip brings BKNG into a prior pivot point. And on the way down, these often provide support. But even if it fails, there are more zones like it all the way down to $1,550 per share.
The stock markets are near all-time highs, so it is best to remain cautious.
BKNG Stock Trade Idea
The Trade: Sell the BKNG Jan 2019 $1,500 naked put. This is a bullish trade where I collect $10 to open. Here I have a 85% theoretical chance of success. But if the price falls below my strike, then I accrue losses below $1,490.
Selling naked puts carries big risk especially for a stock as high priced and as volatile as this. For those who want to mitigate it, they can sell a spread instead.
The Alternate Trade: Sell the BKNG JAN 2019 $1,520/$1,515 credit put spread. The spread has the same odds but would deliver 10% yield on risk. Neither trade require a rally to profit. In fact the stock can fall an additional 22% and I could still retain maximum gains.
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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.