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After a volatile week of trading, OpenTable's (OPEN) stock plummeted over 20% after the announcement that first quarter earnings doubled year over year and the top executives are playing a game of musical chairs with the CFO set to assume the corner office. This nail-biting pullback probably broke the confidence of many experienced traders and investors, but the stock appears to be settling in at level of technical support that paves the way for a seemingly high probability options play with a nice return.

The Technical Thesis

With the headline risk gone and Merrill Lynch, and Oppenheimer coming out with buy ratings post earnings announcement, the technical indicators on OPEN become more reliable. Plotting support and resistance levels is one of the basics for any trader or technician. While there are several ways to calculate these levels, many traders typically pick one or two favorite methods and consistently rely upon them in their trading. In the chart below we have used three methods in identifying four possible levels of technical support for OPEN as the stock begins to pullback from its recent all time high.



Applying the Fibonacci retracement lines to the extreme low and high stock prices over the last seven months (October 2010 low of $55.56 and April 2011 high of $118.66), we get the 1st level of price support at $87.11 which is the 50% Fibonacci retracement line and not so coincidentally the level where Wednesday's gap down was stonewalled.

The 2nd level of price support is the resistance/support reversal line around $82. This is the price level in January where the stock met resistance before breaking out in early February after the year end earnings announcement. This subsequently became a strong level of support during March before breaking out again to new highs in early April.

The 3rd level of support is the 61.8% Fibonacci retracement line at $79.66 while the 4th level of support is the 200 day exponential moving average [EMA] at $78.16, probably the most utilized form of measuring support and resistance levels.

The Trade

Now that we have established a four layer "security blanket" with our last level of defense at just below the $80 price level, we can set up our OPEN options trade with confidence.

In order to maximize our return while limiting our risk, we will look to play OPEN with a bullish put spread. As of Friday's close, the May 2011 $80 strike puts were trading at $.60 and the May 2011 $60 strike puts had a price of $.05. By selling the $80 puts and buying the $60 puts, we collect a premium of $.55 while risking $20 (the difference between our strikes). With OPEN's closing price of $90.70 and our breakeven price of $79.45 ($80 strike less the $.55 premium we collected), we have a cushion of 12.4% to our breakeven, not to mention the 4 support levels that must be broken before getting there. Our return on this trade is a healthy 2.75%, or 66.9% annualized, if both options expire worthless.

With only 15 days left before expiration, a couple of recent analyst upgrades, and a multitude of technical support, you may want to consider making a reservation on this trade of OpenTable.

Disclosure: I am long OPEN via a short position in put options.

Source: Open Table as an Options Play