Airbnb (ABNB) stock is rising, as we wrote in a recent Barchart article. Today, out-of-the-money unusual put options activity is 30 times normal for one out-of-the-money strike price, as seen in Barchart's Unusual Stock Options Activity Report. This could be from bullish ABNB stock traders who are shorting OTM puts for income.
In midday trading on Wednesday, July 26, 2023, ABNB stock is at $148.01 per share. But the Barchart report mentioned above shows that for the Aug. 11 expiration period, over 3,000 put contracts have been trading at the $140.00 strike price today. This amount of volume is almost 30 times its outstanding contracts prior to today's put volume.
That strike price is $8.01 below the spot price, or 5.40% out-of-the-money (OTM), and the premium is $3.88 per contract. This means that the likely initiating trade was from an institutional trader shorting the $140 strike price and they received $3.88 for just 16 days until expiration.
That works out to an immediate yield of 2.77% (i.e., $3.88 premium received/$140 strike price shorted). That is a very good return for most traders, especially since it provides a breakeven level that is 8.0% below today's price (i.e., $140-$3.88 = $136.12, which is 8.0% below $148.01 today).
This means that the trader, if they can repeat this type of yield every two weeks for a year could potentially make an annualized return of 188%. That makes this type of trade very profitable.
Investors Waiting for Aug 3 Results
Airbnb will release its earnings for Q2 on Aug. 3. This is likely why the put premiums are so high right now. Often a stock will fall, even with good numbers, once earnings are released.
This has started becoming the norm with many tech stocks, which run up before earnings and then get dumped or even shorted post-earnings.
However, Airbnb is producing significant amounts of free cash flow (FCF). We discussed this situation in our July 14 Barchart article, “Airbnb Stock Is Still Soaring, Making It Popular With Option Traders.”
For example, last quarter it generated $1.6 billion in FCF. And over the past 12 months, It made a record $3.8 billion of FCF. Mover, in Q1 its FCF margin was an astounding 87%.
Investors expect that the company likely will produce a large FCF level this quarter, although its FCF is typically seasonal.
For example, last year in Q2 its FCF margin was 38% or less than half of the Q1 margin. This is because during Q2 it pays out deposits and payments to hosts for travel booked in Q1.
The bottom line is that if investors can see that its FCF margin in Q2 matched or exceeded the 38% FCF margin last year, the stock could move higher.
In fact, 2 weeks ago we suggested that traders who short-sell the $135 and $136 strike price puts expiring July 28 could make money. At the time they were trading for $1.91 and $2.11 respectively. At the time, these short put trades offered attractive yields, 1.41%, and 1.55% respectively.
Today, those puts are nearly worthless and the investors have kept the yields free and clear of any obligation to purchase ABNB stock at those strike levels. That shows the trader in today's unusual puts is also likely to make good money.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
