Unusual Options Volume for LendingTree (TREE) Raises Concerns

With the Federal Reserve taking on a decidedly hawkish approach to monetary policy, it wasn’t too much of a surprise to see LendingTree (TREE) struggle throughout all of last year. An online lending marketplace, fewer and fewer people wanted to borrow money for any purpose as the central bank hiked the benchmark interest rate.

Investors only need to look at the charts to see how TREE stock went from bad to worse. At the end of the first half of 2022, LendingTree shares gave up around 65% of equity value. Likely, embattled stakeholders hoped that sentiment would stabilize at that point. Unfortunately, the company would go on to incur another devastating six months of volatility. In the trailing half-year period, LendingTree tanked over 55%.

Overall, TREE stock would lose approximately 83% of market value for 2022, reflecting the real narrative of the consumer economy. Simply, as borrowing costs rise, people will tighten their belts, first for extraordinary acquisitions (such as real estate) and later for nice-to-have but ultimately discretionary products and services. Thus, LendingTree acts as a real-time economic barometer.

To be fair, management put on a valiant performance against incredible odds. For instance, TREE stock managed to briefly swing higher following the underlying company’s third-quarter earnings report. In the disclosure, LendingTree posted an adjusted net loss per share of 36 cents. However, Wall Street’s consensus target called for a loss of 89 cents.

Nevertheless, the boost was short lived. Eventually, TREE stock fell as the Fed continued to tighten the money supply. As well, LendingTree didn’t post encouraging sales results in Q3, posting $237.8 million. This tally represented a 20% year-over-year decline and it missed the consensus target of $240.7 million.

Amid little evidence that the Fed will reverse course anytime soon, options traders made their presence known in the derivatives market.

TREE Stock Becomes a Subject of Unusual Options Volume

Following the close of the Dec. 30 session, TREE stock represented one of the highlights in Barchart.com’s screener for unusual stock options volume. This metric shows the difference between the current volume and the average volume over the past month. Traders usually leverage this data to determine which stocks may be due for big moves ahead.

Specifically, TREE’s volume level reached 2,659 contracts against an open interest reading of 4,631. Call volume hit 32 contracts versus put volume of 2,627. Further, the delta between the trailing-month average total volume versus the Friday session volume came out to 696.11%. The implied volatility (IV) rank hit 40.95%, which indicates the (at the money) average IV relative to the highest and lowest values over the trailing one-year period.

To summarize, IV signifies the expected volatility of a stock over the life of an option. As certain influencing factors for the underlying investment changes, the IV will likely change as well. Further, as demand for an option increases, so too will its IV.

The IV low for TREE stock was 53.35% on Dec. 31, 2021. Almost one year later on Dec. 12, TREE hit its IV high at 129.43%. Prospective investors should note that per Barchart.com’s technical analysis gauge, TREE ranks as an average 88% sell. TREE’s medium and long-term indicators rate decisively bearishly, while its short-term indicator points to a split sentiment. That may be because in the trailing five days, TREE gained over 9%.

Interestingly, at time of writing, most covering analysts maintain a strongly optimistic view regarding TREE stock. Three months ago, Wall Street experts rated shares as a “strong buy,” breaking down as six strong buys, one moderate buy and two holds. In the current month, both the consensus and the individual breakdown remains the same.

Presently, TREE stock features a 60-month beta of 1.67, which is considerably more volatile than the benchmark equities index. Thus, prospective (contrarian) investors should exercise caution.

Can LendingTree Beat Its Negative Implications?

As stated earlier, TREE stock managed to gain over 9% in the final week of December. For comparison’s sake, the S&P 500 index gained just a hair above 1% during the same period. Therefore, this performance might imply a contrarian opportunity.

However, the fundamentals don’t appear encouraging. As I stated near the middle of last year, circumstances suggested that Americans are heading toward a recession with massive debt. The latest print from government sources indicates that credit card debt hit an all-time recorded high. Further, circumstances show that this debt expansion may continue to rise in 2023.

Fundamentally, that’s not great news for TREE stock because the underlying enterprise benefits from consumers seeking out the best terms, particularly for home mortgages. But with so many households struggling, big-ticket purchases may diminish in volume, negatively affecting LendingTree. Therefore, the cautious approach in my opinion really makes the most sense.

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