Participation in real estate has long been a high benchmark. However, circumstances worsened dramatically during the COVID-19 crisis due to unique supply-demand disruptions. Still, a key legal settlement could make things easier for homebuyers – but not so much for online housing marketplace listing solutions providers like Zillow (Z). Still, from a trading perspective, the volatility in Z stock could be a welcome opportunity.
According to Barchart content partner The Motley Fool, Zillow suffered a steep drop in market value on Friday after the “National Association of Realtors (NAR) agreed to settle a series of lawsuits brought by home sellers alleging the industry has conspired to boost agent commissions.” The decision could pave the way for reduced broker commissions on real estate sales.
You won’t find too many folks complaining about this prospect. However, it’s a huge concern for Zillow and stakeholders of Z stock. As the TMF article remarked, this development could potentially curb one of Zillow’s bread-and-butter revenue streams.
According to a press release, the NAR agreed to settle all outstanding litigation against the organization and its members in exchange for a $418 million payment made over approximately four years. Further, the NAR will implement a new multiple listing service (MLS) rule prohibiting offers of broker compensation on the service.
Stated differently, per TMF, “this will make it significantly easier for home buyers to negotiate fees with their own agents and could mean more buyers simply forgo using agents altogether.” For Z stock, the reduced commissions that real estate agents will be able to collect for their services could translate to significantly fewer agents willing to maintain their active licenses.
To be sure, circumstances don’t look so appealing for Z stock in the long run. However, in the short term, a “double duty” trading opportunity could be in the works.
Playing Both Calls and Puts for Z Stock
To no surprise given the context, Zillow represented one of the top highlights in Barchart’s screener for unusual options volume. Specifically, total volume reached 133,351 contracts against an open interest reading of 462,670. Further, the delta between Friday’s volume and the trailing one-month average metric came out to 532.9%.
Drilling down, call volume reached 54,684 contracts while put volume came out ahead at 78,667 contracts. This pairing yielded a put/call volume ratio of 1.44. Again, it’s not surprising that more traders opted to engage put options, sensing that Z stock may have further to fall amid a massive disruption to its core business.
A quick look at options flow data – which exclusively screens for big block transactions likely placed by institutions – shows a modest weighting toward options with bearish sentiment. On the surface, the bearish narrative seems the most plausible outcome. However, there might be a contrarian prospect here; that is, to bet on a dead-cat bounce.
On Friday, Z stock closed at $47.71. According to Barchart’s Trader’s Cheat Sheet, the first level of technical support will come in at $46.86. At that point, it’s possible that Zillow shares could temporarily rebound. With that, let’s consider some hypothetical scenarios.
Suppose that Z stock declines to $46.86 near the end of Monday. One idea is to acquire the Mar 22 ’24 47.00 Call. Prior to the closing bell, the call should carry a premium of only $1.20. Suppose that a dead-cat bounce materializes and with two days to expiration, Z jumps to $48.56. At that point, the option would be worth $1.90, giving us a fat profit of over 58%.
However, we know from the cheat sheet that $48.56 is where the first level of resistance exists. So, we could turn around and buy the Mar 28 ’24 47.00 Put. With four days to expiration (near the March 25 close), this contract could be worth only 53 cents. However, if Z stock ends up slipping to $46.86 with two days to expiration, the put could command a premium of 87 cents.
That would give us a profit of over 64%. Of course, these are hypothetical examples using the cheat sheet as our guide. However, it demonstrates the real possibility of playing Z stock both ways.
Keep Trading Until the Volatility Goes Flat
Right now, one of the advantages of trading Z stock options is the high volatility. With a 60-month beta of 1.77, Zillow is significantly wilder than the benchmark S&P 500 index. Therefore, as long as the security moves with gusto, there should be a decent chance of playing this idea on both ends.
As for a long-term investment, I would consider sitting this one out. Sure, in the past 30 days, revisions for per-share profitability for fiscal 2024 have been adjusted upward six times in the past 30 days. That’s a positive sign. However, the aforementioned legal settlement is a huge unknown. Therefore, the sales projections in 2024 and 2025 of $2.17 billion and $2.48 billion, respectively, are suspect.
Also, I wouldn’t have the greatest of confidence regarding 2024 earnings per share of $1.54 and 2025 EPS of $2.10. Again, there are now a lot of question marks. However, the ambiguity makes the near-term trading prospect all the more compelling. For speculators, it’s one to keep on your watch list.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
