Airbnb is showing extremely high implied volatility in the lead-up to the company's earnings announcement on May 8.
We can also see significant volatility skew: Short-term options show much higher implied volatility than long-term options.
One way to take advantage of this skew is via a diagonal put spread. This option strategy is an advanced strategy because it utilizes options over different expiration periods and different strike prices.
Let's look at an example:
Traders could sell a May 10 put with a strike price of 140 and buy a May 24 put with a strike price of 135.
As of Wednesday's close, the May 10 put could be sold for around 1.40 and the May 10 put could be bought for 1.45. The net cost of the trade would be $5, which is also the maximum risk on the upside.
$750 Max Gain On Airbnb Stock Trade
The risk on the trade is on the downside, with a potential maximum loss of $505. This is calculated by taking the difference in the spread (5) multiplied by 100 and adding in the cost of the trade (5).
The maximum potential gain is around $750, which would occur if Airbnb closes right at 140 on May 10.
The trade has a large profit zone in between 135 and 165.
If Airbnb stock stays between these values, the trade should do well. The main risk is if the stock drops below 135.
The initial trade set up has a delta of 4. That means the position is roughly equivalent to being long four shares of Airbnb stock. Note that this delta number can change significantly as the stock starts to move.
Exit Strategy For Airbnb Stock Trade
In terms of trade management, I would look to close the trade if Airbnb stock drops below 140. And I would take a profit if the trade was up around $50-$60 before Wednesday's earnings.
Closing before the earnings date will avoid earnings risk.
According to the IBD Stock Checkup, Airbnb stock is ranked No. 3 in its industry group. It has a Composite Rating of 90, an EPS Rating of 77 and a Relative Strength Rating of 83.
It's important to remember that options are risky and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
