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Timing Your Trades
The Smart Profits Report: Issue #146
Tuesday, September 28, 2004
Timing Your Trades: Two Ways to Expand Your Thinking And Your Profits
By Karim Rahemtulla
Investment Director, Mt. Vernon Research
Travelzoo (NASDAQ: TZOO) is a disaster waiting to happen. If you can, you should short it. Problem is, it is an expensive short at $70 per share. And there are NO put options available on TZOO at all, so a short option play isn’t even possible.
But the Travelzoo conundrum does offer something: two ideas that are critical to profiting from options:
- Going with the market instead of emotions when timing your trades…
- Applying good theoretical ideas like shorting TZOO with puts to another trade that could generate even more money.
Let’s take a closer look at these two concepts, and how we can turn them into big money.
Hot Stock, But Where Are the Market Makers?
Travelzoo is just another discount website offering last-minute specials for hotels and airfare. So what’s new? Nothing, except that a few market morons have decided that this company, trading at over 1,000 times 2003 earnings, is the second coming of Google.
So why doesn’t it have options?
The reasons are plentiful. TZOO has…
- Little to no history of trading
- Poor fundamentals
- Too much short-term volatility…
The shares have gone from $4 to $70 in the past year, and the options market makers have been too slow to react in this situation. After all, didn’t Google just get options after a week of trading? You can be sure that TZOO will have options soon if it keeps behaving like this. In fact, one of the reasons that it is behaving like this is because it has NO options.
Options Help Regulate the Primary Market
Options allow investors to leverage up and down. If TZOO had options, you can bet investors like me would be buying puts. That in turn would create pressure on the sell side, mitigating some of the move - not all of the move, but enough to make others think.
TZOO has just 15 million shares outstanding - so it doesn’t take much activity to move the shares up or down.
What are we to make of this phenomenon?
We’ve seen it before with all those small dot-com companies in the ’90s. (During the heyday of the dot.com era, hundreds of stocks behaved like TZOO and they all had a similar share structure - not many shares out, easily manipulated and moved, and no options. We saw the results of the bubble: Many investors are still living the nightmares of decimated portfolios.)
Travelzoo now trades with a market cap of $1 billion - on sales of only $17 million last year. That’s absurd. Even if sales double this year, it’s not worth a P/E of 1,000 or 700 or even 200.
For one thing, Travelzoo is in a business that has almost no barriers to entry - in fact, quite the opposite, and the competitors are all around. And the more people hear about the company, the less they’re going to like it, I suspect. (I have tried to use TZOO myself, and guess what… I still ended up buying nothing several times.)
So I’m frustrated. But what does that teach us about options?
Travelzoo and You: Applying the Timing Lessons In Other Trades
It’s worth watching a stock like Travelzoo to remind yourself that fundamentals aren’t everything in options trading. Eventually, they will win out… but in the meantime, stocks can go to ridiculous highs or lows and become totally disconnected to reality.
The first thing Travelzoo teaches you is the importance of timing over emotional responses. Whatever you think of the company - and I don’t think much of it - if there were a put available today, I probably wouldn’t take it immediately, at least not a short-term one. Not while this kind of momentum was at work favoring the bulls.
But there’s another lesson you can take from Travelzoo: the secret of broadening your thinking.
Either one thing or the other is happening to Travelzoo’s competitors.
Number one: They are on the same path and you could take an options trade on one of them instead of Travelzoo.
A quick chart of Orbitz (Nasdaq: ORBZ), the closest publicly traded competitor, and Travelzoo shows that Orbitz has fallen over the past six months while Travelzoo has soared.
Number two: Travelzoo’s popularity is drawing investment dollars away from companies like Orbitz, and they may be good shorts. (Think of it. Every time Intel makes an announcement, Altera, Infineon and a host of other semiconductor stocks respond.)
This is by no means a recommendation to short Orbitz or any other Travelzoo rival, but it does remind us that options ideas come from everywhere and a little what-if thinking will definitely expand your opportunities to profit.
Good Trading,
Karim Rahemtulla
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Today’s Smart Profits Cribsheet
- For more on options trading terms, like “fundamentals” or “volatility,” check out our Smart Profits Glossary.
Related Articles:
- My Kingdom for an Option
- The Short Squeeze: Don’t Get Squeezed When Investors Rush to Sell!
- Stocks With No Options: A Cautionary Tale About TZOO
