Stocks With No Options
The Smart Profits Report: Issue #196
Thursday, March 31, 2005
Stocks With No Options: A Cautionary Tale About TZOO
By Karim Rahemtulla
Investment Director, Mt. Vernon Research
A while back I mused about the value of put options on Travelzoo (Nasdaq: TZOO). You may recall Travelzoo as the hugely overvalued purveyor of travel services over the Internet.
At the time, the company’s market capitalization was about 50 times sales. Its price/earnings ratio was about 350. I recommended that short sellers should look to put options on the company… Or, if you had the heart to invest, you could have snapped up some call options. Trouble was, and still is, there were no options available.
Travelzoo, nonetheless, provides an invaluable lesson for traders - precisely because it doesn’t have options. As I’ll explain today, if you’re thinking about buying stocks with no options - especially a fast riser like TZOO - you might want to steer clear entirely…
Here’s why…
Two Ways You Could Have Played It
Were there options available on TZOO at the time, you could have used them to limit your risk - if you were in a gambling mood.
When I first panned it, TZOO was around $50. It subsequently soared to $110 and then fell back to $40, all in less than six months - quite a travel experience.
The reason for using options in this case would have been twofold:
- On the call side: You would not want to risk more than a few dollars because, as is the case with stocks that are more hype than reality, the moves up can be significant and quick, a chance to clean up by buying calls.
- On the put side: The move down can be just as quick, allowing for huge share price losses in very little time. On the put side - and here is where I think options really help, generally speaking - owning puts on Travelzoo would have limited your dollars at risk.
If you shorted the shares at $50, you would have been down $60 per share at $110. And if the shares went higher, you would have been on the hook until you covered. With a put option, your risk is limited to the amount you paid for the put.
The lesson here is that if you are going to play short-term volatile stocks, look to the options market. Volatility is the driving force behind options prices.
The only problem with this whole picture - AND the biggest complaint I had against taking ANY position in this farce (TZOO being so overvalued) - was that Travelzoo had NO options available at the time… and still does not.
No Options? Then the Stock’s Not One Either
If a volatile stock does not have options attached to it then there is less liquidity in the situation for traders.
Traders cannot hedge risk and are therefore subject to the vagaries of the market, manipulation, hype and pure investor insanity.
So, when you are pondering an investment in a fast mover, beware of the options market. If it does not exist, the same market that you are seeking to exploit could end up exploiting you.
Great Trading,
Karim Rahemtulla
|
Today’s Smart Profits Cribsheet
- For more on Travelzoo, an increasingly dubious stock, check out Smart Profits #146, Timing Your Trades: Two Ways to Expand Your Thinking And Your Profits and Smart Profits #148, My Kingdom for an Option.
- For more on terms like "put option" and "call option," check out our free Smart Profits Glossary.
Related Articles:
- Stock Options: How to Buy $2,446 Worth of MSFT for $1,270
- Quote, Trade and Hedge… In Less Than 30 Seconds
- Options On ETFs: Increased Safety and Profit Potential
How One Company's Groundbreaking "Cancer Blaster" Could Make You Rich
While the World Health Organization predicts 12 million people will develop cancer in 2009, this little-known company is fighting the surge with its amazing cancer-killing device...
Although most people know nothing about it, this "Cancer Blaster" has already saved thousands of people around the world... Like Ohio resident, Caroline Brubaker, who says "with just three, pain-free outpatient visits, I had my life back" or Richard Swanson of Arizona who ended up cancer-free after just 4 hours of treatment...
The best part is, the company recently discovered an extraordinary breakthrough that could go mainstream in a matter of days... Read the full details to find out how you can get in ahead of the event - and be on your way to booking truly incredible gains.
|
