Airbnb (ABNB) stock had minimal volume Thursday, notching just 27,522 shares, less than 0.4% of its average daily volume. However, its options volume was an entirely different matter.
The online marketplace for short-term property rentals had an options volume of 214,724 on the day, 3x the 30-day average, with a put/call volume ratio of 0.99. This indicates that investors are neither bullish nor bearish about the company’s stock at present
One thing that stands out about Thursday’s options trading is Airbnb’s unusual options activity. It had six option contracts in Barchart.com’s top 100. Five of them were put options.
If you’re like me and think Airbnb’s got an excellent business model and a stock worth considering as a long-term investment, one of them stands out as a great way to play ABNB stock. Here’s why.
Why I Like Airbnb
As someone who writes about stocks for a living, I rarely see outstanding investor communications. Most of it is mediocre fluff.
Warren Buffett is in a league of his own when telling shareholders what happened at Berkshire Hathaway (BRK.B) over the past year. Airbnb has a shareholder letter every quarter. It’s essential reading if you’re thinking about owning its stock.
In its latest iteration for Q4 2022, the company lays out why the past year was exceptional – 46% year-over-year revenue growth (excluding currency) to $8.4 billion with $2.2 billion in net profits, its first year full year of GAAP profitability -- in this context, it’s hard to understand how anyone could have a negative view of the company and its stock.
And yet, according to Barchart.com’s analyst ratings, the 29 analysts that cover its stock give it only a Moderate Buy (3.69 out of 5) with a mean target price of $133.81, below where it’s currently trading.
Sure, you can arbitrarily say that a price-to-sales ratio of 10.7x is too high, but that wouldn’t consider that it continues to grow revenues at a 40% annual clip. That’s a doubling of sales every 2.5 years. Were it to accomplish this over the next five years, Airbnb is currently valued at 2.7x 2027 sales. You can’t get much cheaper than that.
Barron’s reported comments by KeyBanc analysts on Tuesday shortly after Airbnb’s earnings were out. They added a couple of bucks to its $142 target and continue to have an Overweight rating on its stock.
“‘Guest demand remains robust as active bookers reached an all-time high, driven by continued strength in domestic travel and long-term stays,’ the analysts, led by Justin Patterson, said in a note late Tuesday,” Barron’s contributor Callum Keown wrote on Feb. 15.
RBC Capital Markets analyst Brad Erickson believes that even though the company is executing at a very high level, that’s already priced into its share price. As a result, the analyst only boosted his target price by $25 to $135.
I could go on about analyst comments that say one thing, but they provide very cautious ratings and target prices on the company’s stock. So there’s a definite disconnect.
If you’re bullish about Airbnb’s future, this disconnect provides an opportunity for investors to buy now and benefit down the road once the disconnect disappears.
The Put Option to Sell
As I said in the intro, I’ve got five possibilities: Feb. 24 $140, Feb. 17 $139, Feb. 17 $140, March 17 $145, and March 17 $140. Of the five, the two expiring today can be eliminated, leaving three possibilities.
Let’s look at each of them.
Feb. 24 $140: The bid price on Thursday was $3.75. So, if you were selling this put contract, you had eight days to expiration with $375 of income in your pocket. That brought the effective strike price down to $136.25, 2.2% higher than where it’s currently trading ($133.35) as I write this.
Down almost 4% early in Friday trading, that bid is now $7.05, lowering the effective strike price to $132.95, slightly below the current share price. It’s possible that you could get an effective strike below $130 if you wait until next week. There’s been volume today, but not much. Most aren’t biting.
March 17 $140: This one had a volume of 3,396 on Thursday, 9.59x the open interest. With 29 days to expiration, you were looking at $720 in income if you sold this put for an effective strike price of $132.80, below the current price.
Again, the question is whether you want to own ABNB in the $130s or whether you’d prefer to wait until it’s dropped into the $120s. Today, the bid price is $10.55 with 625 put contracts traded and a last price of $10.81. Assuming you can sell at a $10.55 bid, it lowers the effective strike to $129.45, under $130.
So, this is more appealing than the Feb. 24 $140 put.
March 17 $145: Same days to expiration as above but with a strike price that's $5 higher. So, naturally, the bid was higher at $9.95 for an effective strike of $135.05. But, again, that's above the current price. Today, that same put option has a $14.10 bid, good for an effective strike of $130.90, below the current share price, but higher than $30.
The Verdict
This kind of example demonstrates why options are better suited to investors with higher risk tolerances. But, of course, it’s not easy trying to pigeonhole your best price for entering a stock. Sometimes it can go against you.
Investors sell options for two reasons: to generate income or to buy the underlying shares at a discount. It helps to know why you’re doing what you’re doing in the first place.
Suppose you want to buy ABNB for $125. In that case, you either have to find a put to sell that will generate enough option premium to lower the effective strike to $125, or you might be better served simply waiting for it to drop in price to your desired level, thus avoiding the use of options to achieve your goal.
The most significant risk with selling any of the three puts listed above is if Airbnb’s share price falls below the effective strike price because you’ll have lost money when the put buyer assigns the shares to you at expiration.
Whatever you decide, the long-term success of Airbnb stock appears very bright. It’s a stock to own for the long haul.
Happy Presidents’ Day weekend!
More Options News from Barchart
- Why Phillips 66 (PSX) Seems Like a No-Brainer
- Devon Energy Stock is Down 13%, But its 6.39% Yield Is Attracting Value Buyers
- Bear Put Spread Screener Results For February 17th
- What’s Gotten Into AstraZeneca’s Unusually Active Options?
On the date of publication, Will Ashworth 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.
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