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Zillow Inc (Z) Call Buyers Bank On a New High

Expecting Z to break the century mark, traders descended on out-of-the-money calls

by 8/21/2013 10:44 AM
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The shares of Zillow Inc (NASDAQ:Z) lost 4.8% yesterday, after dropping over 7% on Monday, due to a $412 million stock sell-off by company insiders. Today, however -- one day after announcing the purchase of New York City's StreetEasy for $50 million in cash -- the online real estate service has gained 4.5% to trade at $84.36.

That being said, call and put volume ran close to even in Z's options pits Tuesday. Digging deeper, the most actively traded option was the January 2014 100-strike call, where close to 1,400 contracts traded at a volume-weighted average price (VWAP) of $6.14. Over 80% of the calls changed hands at the ask price, and open interest added 1,184 positions overnight, pointing to buy-to-open activity.

Accordingly, the traders stand to profit should Zillow shares ascend beyond $106.14 (strike price plus VWAP) by options expiration in January. If the underlying falls short of the century mark, however, the most the speculators can lose is the premium paid.

From a wider-sentiment perspective, Z has experienced a rush of recent call-buying activity. Data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) indicates the stock's 10-day call/put volume ratio is 1.55, which means calls have been bought to open more quickly than puts during the past two weeks. What's more, the ratio ranks in the 76th percentile of its annual range, which implies calls are being picked up over puts at a faster-than-usual pace, relative to the previous 52 weeks.

At the same time, however, some of the call buyers may be hedging their short stock positions. Currently, about 26% of Zillow's outstanding float is sold short, which would take nearly 10 sessions to cover, given the security's average daily trading volume.

Meanwhile, on the technical front, Zillow Inc (NASDAQ:Z) has been formidable, this week's sell-off notwithstanding. The shares have nearly tripled in value in 2013, and are coming off an all-time high of $97.29, notched less than two weeks ago.


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