A bearish options trade that pays off if hotel stocks start to feel a travel slowdown like airlines

Published Wed, Nov 8 202310:30 AM ESTUpdated Wed, Nov 8 202310:39 AM EST

As airlines continue to add capacity after a year of record demand for revenge travel, consumer demand after the pandemic is showing signs of slowing. Prices for many routes in 2024 are now priced significantly lower than this previous summer for both economy and business class tickets. Interest in travel across Europe and Asia is looking softer into 2024. Airline stocks have already lost about a third of their value in the last three months, yet hotel shares have held up fairly well. .XAL YTD mountain NYSE Arca Airline Index YTD With over 75% of its international revenue generated from Europe and Asia, I see the risk that a hotel stock like Marriott (MAR) will play catch-up with the declines that we've seen from airlines over the past few months. If we look at a chart of MAR, we see that it broke out above its key $180 resistance level to a new all-time high back in July. After trading to a new all-time high above $210, it's now back on a downtrend and likely to revisit its $180 support and potentially breakdown further below that. Additionally, MAR currently trades at over 22 times forward earnings, which looks ambitious, especially as guidance provided for the rest of 2023 has been revised lower. My concern is that we are going to see further negative guidance in future quarters as the economic and geopolitical risks rise. If we look at the implied volatility of MAR options, it isn't particularly high, however the skew between at-the-money options and out-of-the-money options are quite high and provide a unique opportunity to sell a neutral to bearish call spread. I'm looking out to the Dec 22 Weekly expiration to sell the $195/$205 call vertical spread. I'm able to collect $4.02 in credits which is just over 40% of the vertical width. (Reminder a vertical spread involves buying or selling options with same expiration but different strikes.) This strategy would risk $598 per contract if MAR is above $205 by the Dec 22 expiration and have a maximum gain of $402 per contract if MAR simply trades below $195 at expiration. So, if the stock declines or even if it stays puts, we will make the potential max profit on this trade. Additionally, with a credit spread, I would set a stop loss if I lose 100% of the premium that I've collected at around $8.00 debit. DISCLOSURES: (None) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL'S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.