Easily one of the biggest options trades featuring a split narrative, TripAdvisor (TRIP) – which operates online travel agencies and comparison-shopping websites – has been perplexing market participants about its forward trajectory. About the only thing that was (largely) certain was that wherever TRIP stock went, it would do so in grand style. Now, the question is, where will it go next?

From the perspective of retail investors focused purely on the open market, TripAdvisor presents incredible frustrations. On the one hand, the bearish argument is seemingly plain as daylight. While the revenge travel phenomenon – that is, collective cabin fever from the COVID-19 lockdowns transitioning to pent-up demand for experiences – initially fueled investments such as TRIP stock, some evidence shows that this catalyst is beginning to fade.

Just by logical deduction, investors can quickly conclude that the total addressable market for travel-related enterprises may be diminishing. For example, Americans’ credit card debt exceeded the $1 trillion mark, a dubious milestone. With stubbornly high inflation and simultaneously high interest rates, consumers’ ability to pay for discretionary products and services also faces significant headwinds.

Nevertheless, it may be too early to cast doubts on TRIP stock. According to an AP report, TripAdvisor posted third-quarter net income of $27 million. On a per-share basis, the company reported profits of 19 cents. When adjusted for non-recurring items, earnings per share landed at 52 cents. Critically, this figure beat analysts’ consensus target of 48 cents.

Not only that, TripAdvisor rang up $533 million in sales in Q3. This too topped expectations, with analysts calling for $506 million. Subsequently, following the closing bell, TRIP stock gained over 12%. Is it then time to consider the bullish thesis?

It’s complicated.

TRIP Stock Presents a Frustrating Guessing Game

Not shockingly, TRIP stock represented the top highlight in Barchart’s screener for unusual stock options volume. Total volume of all TRIP derivatives hit 56,045 contracts against an open interest reading of 176,909 contracts. Compared to the trailing one-month average metric, the difference in volume level clocked in at 1,465.50%.

Notably, call volume stood at 45,760 contracts against put volume of 10,285 contracts. On paper, this pairing yielded a put/call volume ratio of 0.22. From a face-value interpretation, more traders are buying calls, which give holders the right but not the obligation to acquire the underlying security at the listed strike price. However, it’s important to consider the parties of the transaction before jumping to conclusions.

Looking at Fintel’s options flow data – which screens exclusively for big block trades likely made by institutions – we see that a substantial portion of Monday’s trading activity stemmed from major entities. What really stood out in the data, though, was a possible “straddle” taking place.

For the Jan 19 ’24 19.00 Call, a trader (or traders) bought 18,529 contracts of this derivative. Half an hour later, possibly the same trader (it’s an assumption, to be clear) sold 17,865 contracts of the same derivative. Absent of true confirming data, the information we publicly have access to strongly implies a straddle.

For a quick recap, straddles represent wagers not based on direction but rather magnitude (volatility). So long as the underlying security moves strongly enough to outweigh the costs associated with initiating the “dual” transaction (since the trader would be buying and selling or writing the same option), the deal should be profitable.

For straddles, the risk centers on the underlying security not moving at all or not moving enough. At that point, the costs tied to making the trade would outweigh any gross benefits. However, given that so much attention was focused on TRIP stock as a barometer of consumer sentiment for travel-related expenditures, it was a relatively safe bet that it would move somewhere significantly.

Okay, so the options traders won this game. But what does that mean for retail investors moving forward?

Focus on the Fundamentals

In the immediate timeframe, investors should be mindful of a possible gamma squeeze materializing in TRIP stock. A gamma squeeze occurs when market makers – who facilitate options trading – take the opposite side of a given trade to manage risks. So, when traders buy a large amount of call options (as was the case for TRIP), market makers are effectively short these options.

To hedge the exposure, market makers must buy more shares of the underlying security (since they’re short or selling calls). Naturally, this buying activity may cause the stock to rise higher. In turn, that might alarm traders who are ALREADY short the security in question. And if you look at the options flow data prior to the Nov. 6 session, many institutional investors were apparently short TRIP stock.

Given the tactical data, TripAdvisor should rise higher in the near term. For day traders, TRIP stock might be a quick profitable scalp. However, the longer-term framework is, in my opinion, very questionable.

With pressures continuing to build in the consumer economy, it’s difficult to see how travel-related enterprises can continue running higher. Even options flow data shows that the peak strike price for all option contracts have been steadily declining since the Feb. 17, 2023 expiration date.

That implies that the speculators are keeping their ambitious trades to more realistic levels. Frankly, that doesn’t speak to great confidence in TRIP stock and the underlying industry.

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