Complex strategy targets hotel giant before earnings

Hotels have been quietly outperforming the market, and one trader is planning a quick stay at the leading name.

Marriott (NYSE: MAR), Wyndham (NYSE: WYN), and Hilton (NYSE: HLT) don't usually turn a lot of heads, but they did begin the year with a bang as analysts trumpeted a wave of improving fundamentals.1 Yesterday they were back in focus with a complex options strategy on the cusp of some key earnings. Its target was none other than MAR, the industry's biggest player by far:

  • A block of 3,400 11-August 105 calls was bought for $1.40. That gives the investor the right to buy 340,000 MAR shares for $105 through the end of next week.
  • A block of 6,800 11-August 107 calls was sold for $0.85. That will force the trader to deliver 680,000 shares for $107 if they're over that level.
  • Wait a sec! That means they're essentially short 340,000 shares of a high-flying rock star stock! Are they crazy? 

Not when you ID the strategy. It's called a ratio spread, and it’s named that because they wrote twice as many contracts as they bought. The benefit is that they brought in more income, which lowers the cost. In this case they were actually paid a credit of $102,000. (They paid 3,400 X $1.40 X 100 = $476,000. They received $6,800 X $0.85 X 100 = $578,000.)

Plus, there's a very strong probability they already own shares in MAR. So in that case, they're not running the risk of getting caught "naked short" in the hotelier.

Marriott (MAR) 1/5/17 - 8/1/17 chart

Source: OptionsHouse by E*TRADE

And even more, maybe they got long the stock when it was much lower and are sitting on some big profits. That's when the ratio spread starts to make sense. Consider this potential sequence of events:

  • Earnings are due after the closing bell next Monday, August 7. If the numbers impress and it has a good report and breaks through $107, they'll collect $680,000 from the ratio spread. (Buy 340,000 shares for $105 and sell the same for $107.) They'll also have to cough up another 340,000 shares from their earlier stake. 
  • But say, on the other hand, management fumbles and MAR heads lower. Then the position will become worthless and the investor will simply keep that initial $102,000 credit. 
  • Their biggest risk is that they miss a blowout rally. No matter how high the shares may spike they have to sell at $107 if it's over that level on expiration. 

MAR slid 1.56 percent to $103.49 yesterday, but is up 25 percent so far in 2017. It's ridden a wave of strong margins, improving market share, and higher room rates. On top of that, the company is expanding in Europe at a time when investors are clamoring for anything global.2 WYN also reported better-than-expected results last night and HLT raised guidance on July 26.3

Bottom line: Anyone can buy a stock in hope of a rally, but it's with options that traders can check in, check out, and get paid in a single shot.


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1. Bank of America Merrill Lynch: Review: Raising estimates and PO to $112. 5/10/17. Marketwatch: Marriott revenue rises on Starwood acquisition. 2/15/17.

2. Reuters: Marriott profit beats on higher occupancy. 5/8/17. Marriott (press release): Marriott International Announces 2020 Growth Vision in Europe Post Starwood Acquisition. 3/7/17.

3. Wyndham Worldwide Corp (NYSE:WYN) reported earnings of $1.53 per share beating Walls Streets expectations. 8/3/17. RTT News: Hilton Worldwide Raises 2017 Outlook. 7/26/17.