EOT Trade Alert – October 25, 2012
October 25, 2012
Trade Alert:
Buy OPEN December 2012 $40 Puts at $2.00 or better
Company Background:
OpenTable (OPEN) provides free online restaurant reservations for diners and reservation and guest management solutions for restaurants.
Short-Term Catalyst:
OpenTable operates a straightforward business.
They’re leading the charge to change the way diners make restaurant reservations. Diners use their website and mobile apps to make restaurant reservations over the internet instead of over the phone.
And I have to admit, it’s not a bad free service.
But here’s the thing…
Their simple business model is easily duplicated. And increased competition from Google (GOOG), Facebook (FB), and Apple (AAPL) is already causing sales growth to slow.
They’re trying to combat the slowing growth by buying up other online reservation companies. But the fact is, slowing growth has led to extremely volatile EPS lately.
There’s a good chance history repeats itself when OPEN reports earnings next week. And if growth is still slowing, the stock will likely take a big hit.
What’s more, the stock has rallied over the last week on the rumor OPEN could be a takeover target for Yahoo! (YHOO). But more often than not, rumored takeovers never come to fruition. And the stock ends up giving back all of the takeover rumor gains once the buzz goes away.
Let’s grab put options on OPEN to profit from the post-takeover rumor slump and the potential for weak quarterly earnings.
Trade Details:
| Underlying Stock Symbol: | OPEN |
| Current Bid-Ask Price: | $1.60 – $1.80 |
| Option “Buy Up To” Price: | $2.00 |
| Break-Even On Stock At Expiration: | $38.00 |
| Maximum Risk Per Contract: | $200 |
Exit Strategy:
OPEN is trading at $46.15 per share. Resistance levels will be at $49.00 and again at $50.00. Remember, we want this stock to move lower. Support levels will be at $40.00 and $36.00. Conservative investors should look to exit at the first support or resistance level. Aggressive investors may want to hold for a bigger move.
Chart:
Category: EOT Trade Alert
