“W” is For WHY ON EARTH…? (W)

Posted on May 31, 2020

Bored stiff at last Tueday’s online Mensa meeting, we turned our attention to an ad that repeatedly popped up on the sidebar.

It was for home furnishings, encouraging all of us fatigued and spiritless, corona-bound working stiffs to get ourselves a new desk, chair, shelving, etc., and make the most of this extended Wuhan lockdown redecorating opportunity.

And because it was precisely the last thing on our minds (we were struggling at the time with a game theory exercise set to the soundtrack of ‘Tommy’), it struck us as just another desperate attempt by a failing firm to dig up customers before it veered into the corporate dumpster.

Wherefore Wayfair? (W)

As it turns out, those spiffy little ad splashes were the product of none other than Wayfair Inc. (NYSE:W), Boston-based purveyor of everything imaginable for the lazy home drek-orator.

We’d heard the name, of course, but as we only buy Edwardian mahogany we never paid it any mind.

And yet those ads…

They pestered us enough to inspire a look at the company’s fundamentals (no dividend, no yield, no Book Value), and then at her chart.

Which looks like this –

The chart is no inducement to buy – in the least.

Consider –

  • After increasing ten-fold in value (!) in just two months (on the back of a vice-like short squeeze), W appears to have run out of juice.
  • Volumes have tapered significantly,
  • RSI and MACD are indicating a top (in green), and
  • There remain a host of gaps to be filled on the way down (in blue).
  • And if that weren’t sufficient, precisely at the May 12th peak, we also see a bearish engulfing pattern.

All told, not a sweet landscape for the bulls.

Wayfair did a fairly brisk business while the lockdown was tightest, but we can’t envision an environment that would permit that to continue.  In the last earnings call, even the company’s CFO expressed doubt the trend would last.

And with that in mind, we’re recommending a laddered PUT strategy to take advantage of the share’s coming weakness.

Like this –

A Jew and His Money recommends you consider buying the January 15th 185 PUT for $49.60 and selling both the January 15th 165 PUT for $35.60 and the January 15th 105 PUT for $13.50.  Total debit on the trade is $0.50.

Rationale: the long PUT is already 14 points ITM.  If W pulls back as we expect, we’ll gain the full 20 points on the 185/165 spread.

The additional sale of the 105 PUT helps us pay for the 185/165 spread, which would require too much up front to make the trade worthwhile.

Only caveat is the 105 PUT is naked, and although it’s currently 40% OTM, it still represents a potential catastrophic risk.  Which means you must set STOPs to close the trade should W begin to trend toward 105.

At precisely the point where the value of the spread is just $0.50 more than the value of the naked short PUT, you should program the trade to close.  That is, set a contingent order that will terminate the trade when the credit between the PUT spread and the short PUT is exactly $0.50.

Maximum gain on the trade is $19.50.

Maximum loss – if proper STOPs are set – is NIL.

With kind regards,

Hugh L. O’Haynew


2 responses to ““W” is For WHY ON EARTH…? (W)”

  1. M T says:

    Just rolled the 105 up to 130 for a delicious credit…funny to read this trade letter again, wayfair seems a fitting good example of how nutty things have gotten lately. I pinch myself to remind that this is like a discount online ikea.

    Put a strangle on the big W late last week and I’ve already rolled up the put as we head into earnings tomorrow. This puppy can really move!

    With the roll from 105 to 130 my original position (from this letter) is showing a credit to open of 6 hundred with the current midprice around 37 bucks…this is after closing the other half for around 400.

    As always, thanks.

  2. Hugh L. O'Haynew says:

    MT, you’re a rock.
    Though we warn you — your continued excellence in the field might shortly land you a job with us.
    In which case, you’ll have to submit to our weekly “Truth/Dare/Double Dare” contests, which generally begin with a rack of billiards and end with a bucket of moonshine and a carton of clove cigarettes.
    Caveat emptor!

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