Airbnb (ABNB) stock is still soaring, making it popular especially with options traders. ANB stock is up over 68% YTD at $141.72 as of July 14 early trading, including over 13% in the last month. Investors who have bought calls, as well as shorted call and put options still hope that this will continue.
Earlier this month we discussed the “revenge travel” phenomenon which has caused Airbnb's free cash flow (FCF) to soar.
We discussed this in the Barchart June 29 article, “Airbnb Stock Still Looks Attractive To Value Buyers, Given Its Massive Free Cash Flow.” We had originally paid attention to this stock in our article on June 7, “Unusual Call Options Activity In Airbnb Stock Indicates A Large Bullish Investor.”
Massive Free Cash Flow
What is driving this is that in Q1 2023 (released on May 9) Airbnb reported massive amounts of free cash flow (FCF). The company generated $1.6 billion in FCF during the quarter. It also produced a record level of $3.8 billion of FCF over the trailing 12 months (TTM).
Investors now expect this FCF generation to have kept up during Q2 and they hope to see higher FCF amounts. For example, in Q1 its FCF margin was an astounding 87%.
That means that almost all of the company's revenue (i.e., 87%) went straight to its cash pile. There were only 13% of expenses deducted from its revenues.
Moreover, this was even higher than the prior's year's Q1 FCF margin of 79%. However, keep in mind that Q1 is the company's high point for the travel season. That is when the company takes in fees, and deposits and has few expenses charged and few payments to Airbnb hosts. This can be seen in the company's own table below.
It shows that for Q2 the FCF margin last year was just 38%, or less than half of the Q1 margin as deposits and fees get charged and it pays out deposits and makes payments to hosts for travel booked in Q1.
So, if the company can improve on its 38% FCF margin from last year, as now seems likely with the revenge travel phenomenon, its FCF will continue to soar. In addition, with more bookings, its FCF efficiency (i.e., the conversion of revenue into FCF) likely improves
That is what is driving the stock higher.
Shorting OTM Puts and Calls
Some traders are likely going long call options as a cheap way to buy the stock. That is risky if the company's FCF comes in less than expected. Nevertheless, there is good momentum pushing ABNB stock higher.
In fact, those who shorted out-of-the-money (OTM) calls as we suggested in our last article would have had to sell their stock holdings as ABNB soared past the exercise price we discussed.
One way around this issue of getting exercised is to short out-of-the-money (OTM put options. That way even if the stock rises, the short put trader does not have to give up the stock.
By doing this, they can go long the stock and also short lower OTM puts as a way to potentially dollar average cost and reduce their average buy-in cost.
For example, the July 28 expiration option chain at Barchart shows the $136 and $135 put strike prices, have attractive put premiums. They are 3.6% and 4.3% below today's price.
The $136 put trades for $2.22, which gives it a yield of 1.63% (i.e., $2.22/$136.00). In addition, the $135 put is selling at $1.91, yielding 1.41% (i.e., $1.91/$135.00).
This means that the trader who puts up $13,600 in cash and/or margin with their brokerage firm, can then enter an order to “Sell to Open” 1 put contract at $136.00. The account will immediately receive $22.00. That is why the yield is 1.40% since $222/$13,600 is 1.63%.
Similarly, after securing $13,500 with the brokerage firm, the put trader can earn $191 by shorting the $135 put contract. This works out to an annualized yield of over 34% since there are 26 periods during the year that this could potentially be done.
That is why this type of trade is so popular with value investors, especially those who are also long the stock.
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.
