Options Play of the Week: It's All Happening at the 'Zoo'

I hope everyone in the Real Money Pro community is having a joyous and safe holiday season with family and friends. As 2021 comes to a close, there are two developments I am watching carefully. The first is initial data coming in on the Omicron variant of Covid-19. Fortunately, so far, everything seems to point to a version of the virus that spreads rapidly but has much lesser severity than variants before it, such as Delta. The seven-day moving average of Covid cases in the United States is up more than 35%. However, the weekly moving average of Covid deaths is up just 4% while hospitalizations are up only 2%. While there is always a lag between these figures, this is encouraging. My holiday hope is that Omicron, because of how fast it spreads, triggers a huge amount of natural immunity at a much lower cost than previous variants and helps end this pandemic in 2022. It is a situation I will continue to monitor. Second, it seems the January Effect might have arrived based on trading action on Thursday. Lots of beaten down sectors of the market, including biotech and some of the most oversold parts of the small-cap universe, got a nice boost in trading. And that brings us to our covered call idea for Monday, which should benefit from both trends. Media company Travelzoo provides travel, entertainment and local deals from travel and entertainment companies across the globe. The stock currently trades just over the $10 level. The shares are off more than 40% from their highs earlier this year, before the Delta variant arrived on the scene and impacted global travel. The company's third-quarter revenues came in lower than expected, but sales still increased some 14% from the same period a year earlier. If I am right and Omicron is part of the end stage of this pandemic, travel stocks should do well in 2022. Travelzoo has navigated well through the coronavirus outbreak and has done a commendable job taking fixed costs out of its business model. As it is, the company expects to return to profitability this quarter and is already close to that despite business being less than two-thirds of what it was prior to the pandemic. If normalcy returns to the industry, Travelzoo should be able to produce some significant cash flow from its streamlined operations. Add in a solid balance sheet, and the stock seems attractive on a risk/reward basis and also seems to be putting in a trading floor. Option Strategy Here is how I added to my TZOO stake via a covered call strategy on Thursday. Remember, covered call orders involve buying an equity and simultaneously selling just out of the money call strikes against the new position. Liquidity was only so-so during the day Thursday as volume was down due to the approaching holidays, but the orders filled in less than 15 minutes. Using the June $10 call strikes, fashion a covered call order with a net debit in the $8.00 to $8.20 a share range (net stock price - option premium). This strategy provides both approximately 20% of downside protection and potential upside of just under 25% at the midpoint even if the stock does nothing over the option duration. (Please note that due to factors including low market capitalization and/or insufficient public float, we consider TZOO to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.)

Options Play of the Week: It's All Happening at the 'Zoo'

Our covered call idea for Monday should benefit from two trends we're seeing as we close out the year.

Columnist Conversation

We're Cleaning Out This Retailer From the Bullpen

This Weekend on Real Money

CPI Beats Expectations, But Maybe Not the 'Whisper'?

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.