Options Turn Bullish on Battered Expedia Shares

Options activity on Expedia has turned bullish - but only to a point.

Source: expedia.com

The stock fell as much as 18% Friday after Expedia's outlook disappointed Wall Street. That, coupled with fourth-quarter earnings that missed by a penny sent shares into a tailspin.

Not even an analyst upgradeMonday helped shares of the online travel agent's shares recover from the steep declines. But the lower stock price is attracting options traders, with daily volume reaching more than 2.5 times the average by early afternoon Monday. Still, these investors are putting a ceiling on how high they think Expedia shares will go.

"It looks like bullish activity in the name is outpacing bearish activity by 6%," Mike Khouw, Director of U.S. Equity Derivatives Trading at Cantor Fitzgerald said Monday.

One notable trade changing hands today was the July 17/27 strangle. In this bet, the buyer is willing to get long on Expedia if shares fall to $17, but would short the stock if it hits $27.

"It's a bet that the stock is going higher, and the buyer is trying to capture 30% of upside," said Khouw, who is an Options Action contributor.

At the same time, this strategy puts a ceiling on how bullish the investor is willing to get.

The most active options trading Monday included Jan '12 25 calls, July 17 puts, July 27 calls and July 25 calls. Of the directional bets, 25% were bearish while 31% were bullish.

Late Thursday, the online travel agent said its fourth-quarter profit sank 30%, missing estimates. In addition, Expedia warned its investments in improving its online platform and in expanding globally would hurt its earnings growth through the first half of 2011. In response, there were at least four rating downgrades, including cuts from Bank of America Merrill Lynch, Deutsche Bank and ThinkEquity.

Investors also remain cautious on Expedia as the contract dispute between AMR Corp. and other travel websites threatens to change the online travel industry.

But options traders seem to be taking heed of Susquehanna analyst Marianne Wolk, who raised her opinion Monday to "positive" from "neutral" on Expedia. She lowered her price target to $26 a share from $28.

"EXPE shares have declined more than 26% since our September 20 downgrade, far more than the 12% reduction in our 2011 forecasts. We find the shares compelling at current levels, particularly as most of the cutbacks stem from discretionary investments meant to drive greater returns by 2012," Wolk wrote in a note to clients.

On the plus side, Wolk sees Expedia's hotel bookings growth improving after Expedia upgrades its platform. She points to Hotels.com'sstronger conversion rates and 30% room-night growth thanks to its platform upgrade in the last year.

At the same time, the analyst lowered her estimates in line with Expedia's higher near-term spending outlook. She also noted that Google's ITA acquisition is a looming risk.

Despite these risks, the options market is telling us that Expedia shares may be worth a look — they're undervalued and worth a hedged bet.

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  • Melissa Lee

    Melissa Lee is the host of CNBC's “Fast Money” and “Options Action.”

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