It’s no secret that I’ve been casting a bearish eye on shares of Airbnb (ABNB) for the last few months. As a matter of fact, it’s been darn near a year that the stock has been on my “Do Not Buy” list.
But things are looking to get uglier again for this “Gig Economy” stock.
A few weeks ago, I tagged Airbnb as the “Bearish Stock of the Week” on my weekly Five Stocks Watchlist. Click here if you missed it.
But the real meat on this bearish stock was uncovered back in May when I covered ” Why the Short-Term Rental Boom is About to Bust” (click here to read), targeting the long-term outlook to take the price to $100 and lower.
But today, shares of Airbnb are falling into a familiar “Volatility Trap” as the stock is preparing to break through critical support after a month of no activity at all.
First, the stock is sliding below the $113 price level.
That number may sound random to you, but the stock has been holding this price as support since the stock dropped 15% after the company’s last earnings report.
While $110 is the critical “Trigger Price” that will cause investors to rush into the market as sellers, a break below $113 will represent new closing lows for the stock.
Second, the stock’s Bollinger Band.
For those of you that may not know what a Bollinger Band is, let me explain quickly.
Bollinger Bands are a measure of a stock’s volatility. The more volatile a stock is, the wider the Bollinger Bands will be. The less volatile, the tighter. The chart below displays each situation.
While Bollinger Bands may seem complicated, the message they deliver is simple.
The tight Bollinger Bands around Airbnb’s price right now signal that the stocks has been quiet for the last month or more.
When you break one of the Bollinger Bands it results in a Volatility Storm that forces the stock to make a directional move.
In this case, Airbnb is preparing to break the bottom band, indicating that the Volatility Storm is going to force a volatile move lower for the stock.
We saw this same situation in July as the stock broke through its lower band, resulting in a -20% decline in ten trading days.
That break below the bottom Bollinger Band will trigger the Volatility Storm.
Prices will then break through $110, a price that is the “line in the sand” for traders, which will increase the selling pressure until Airbnb hits its next level of support.
From the look of the chart, that next level sits at $100, about 12% lower than the current price.
If you’ve been a bull on Airbnb and hold the stock in your portfolio, brace for another fast and aggressive decline.
Airbnb’s earnings aren’t scheduled until October 30. Don’t expect a good earnings report to bolster shares until then.
We’re not likely to see the stock crater beyond $100 until that earnings report hits, so that should be the extent of the damage for now.
Options Traders Have an Opportunity Here
As always, a situation like this opens an opportunity for those that have the education and experience in trading options.
For my money – and yes, I am currently short the stock using options – the November 15, 2024 $110 puts provide a logical and less risky position to benefit from the expected decline to $100.
Those options currently trade for $555 per contract.
Should the stock drop to $100 before October 25, a few days ahead of the earnings report, that option would be theoretically valued at $10.71. That’s a return of about 93% for a somewhat conservative hedge on the stock.
As always, set reasonable targets for your loss control on the position in case Airbnb should begin an unexpected rally.
Also remember not to get too greedy if the position reaches its profit target. Airbnb will find some support at $100, meaning that this options time will run thin if you hold out for the stock to dive deeper.
