Expedia Inc. EXPE

Group H:

David Hanrahan – 15034313

Staats Battle – 15096556

Dmytro Dudko – 15055221

*Word count = 996 words (Excluding Graphs, Titles & Bibliography)

**Page length = 3 Pages (Excluding Cover page & Bibliography)

Strategy: Long Volatility

Strategy Rationale:Our main reasoning for implementing a long volatility strategy was a) Expedia’s earnings report was expected on the 29/10/2015 and b) With analyst forecasting increased travelling over the Thanks giving and Christmas periods3, it would suggest an influx of new sales and possible growth in Expedia’s operations. Financial analyst were recommending a ‘Buy’ status on Expedia shares which further suggested that share prices would increase on the disclosure of their earnings report.

Implementation:We bought 50 EXPE call options with a Strike price of $134 and a call premium of $3.40 each. We went short on 165 EXPE shares, as Delta was currently .5142. The Implied volatility was 32.69%. This is the forecast of future volatility of the underlying stock. With this level of IMV we believed our strategy would be fruitful in its implementation and execution. On implementation of our strategy we were exposed to high levels of ‘Greeks’ implied that our strategy would require constant rehedging therefore constant buying high and selling low.

Option premium

IMV Delta Gamma Vega Theta -1% implied volatility

-5% share

3.40 32.69 .5471 5.9937 574.32 -544.99 $3.29 $0.945.40 31.16 .5142 6.2065 556.78 -561.66 $5.28 $2.542.85 32.78 .7229 5.25 472.54 -537.83 $2.73 $0.581.40 32.11 .4549 6.5322 521.14 -595.13 $1.29 $0.021.29 36.47 .31 5.7746 396.25 -636.69 $1.18 $0.01

Performance analysis:IMV increased over the trading period, as expected. Our long volatility strategy made a profit of $ 1,709.38. Although we did not benefit from both shares and call options we were happy that we hedged our risk adequately. Our calculations indicated a potential mistake on the unrealized loss on a particular trading day of 05/11/2015 as seen below. This we believe was down to both inexperience and negligence. If implemented for a second time we understand that a potential greater profit may have been realized.

Date Price of underlying

Implied volatility

Profit/loss on a long call option position

Profit/loss on a short shares

position

Unrealized Profit/loss

04/11/2015 $134.02 31.16 $-3,000.00 $246.24 $ -2,753.76 05/11/2015 $138.82 32.78 $7,000.00 $-12,094.56 $ -5,094.56 06/11/2015 $132.89 32.11 $-5,750.00 $9,342.39 $ 3,592.39 09/11/2015 $129.70 36.47 $-13,000.00 $16,599.64 $ 3,599.64 10/11/2015 $130.13 35.51 $-13,000.00 $15,933.14 $ 2,933.14 11/11/2015 $129.27 35.06 $-15,500.00 $17,209.38 $ 1,709.38

Realized profit on a long volatility strategy on 11.11.2015 $ 1,709.38

Strategy: Strap

Strategy Rationale:Anticipating Expedia earnings report. The outcome of the earnings was expected to be positive according to the markets analysts. This strengthened our decision to implement a Bullish strap strategy. EXPE share price was gaining momentum in light of its earnings disclosure4. Expedia have provided shareholders with dividends of $ 332 up to the Q 2 of 2015. Expedia have announced a dividend hike of $0.24 for its investors. The company currently has a dividend yield of 0.85%5. This increase in

dividend would see an increase in share price and market demand for EXPE stock. This would further benefit our bullish strap strategy and we believed that above information justified our decision to implement the strap.

Implementation:We went Long on 10 Call option contracts (1000 shares) for $511 at a strike price of $125 and went long 5 Put options contract (500 shares) for $320 at a strike of $125. The underlying Delta of our strategy was 39.53%. We calculated the effect a decrease or increase in IMV would have on our underlying share price below. Trading strategy Strap: Risk ExposureTrade Details Impact on option share prices

Type Option contracts

Strike Price/share IMV -1% IMV

+1% IMV

-3% IMV

+3% IMV

Call 10 $125 $5.11 32.00% $4.99 $5.23 $4.76 $5.46Put 5 $125 $3.20 35.27% $3.08 $3.32 $2.85 $3.55

Performance analysis:Our strap strategy was successful. It resulted in a profit of $3,090. We calculated a profit from our Long call options and resulted a loss on our Long put option contracts. This was due to our expectations that market performance of EXPE shares would improve. We hedged our risk by going Long double the number of call option contracts relative to Puts. This presented us with the opportunity that if markets improved we would make a greater profit. If they decreased the hedge of options would decrease the amount of loss we could have potentially incurred.

Strap

    30/10/2015 03/11/2015  

Profit $3,090.00

Long call option contracts

Strike: $125.00 Expiry: 20.11.2015 10 $511.00 $-5,110 10 $940.00 $9,400.00 $4,290

Long put option contracts

Strike: $125.00 Expiry: 20.11.2015 5 $320.00 $-1,600 5 $80.00 $400.00 $-1,200

Strategy: Bear Spread

Strategy Rationale:Our forecast of a positive earnings release by Expedia exceeded expectations. As a result EXPE share prices rose by $ 9. This large increase in prices benefitted both other trading strategies (Volatility & Strap). The Efficient market hypothesis (EMH) indicates that all current share prices perfectly reflect all available information, but that also a rebalancing period in the market occurs6. In our case the EXPE share price increased to $ 136.30 on Fridays close (Oct 30th), $ 9 above the price on commencement of the trading period. Our inexperienced showed as we did not assume or adjust to a sharp decline or rebalancing of EXPE shares prices as EXPE share prices started to decrease to $134.17. There was certain volatility in the market at this moment as EXPE shares continued to drop in price. Therefore to hedge ourselves against risk and a declining share price we implemented a bear spread.

Implementation:On the 11/10/15 we went Long 50 EXPE call option contracts at a strike price of £130 costing $309. We shorted 50 EXPE call options contracts with a lower strike at

$128 for $405. This reasoning behind the lower strike was that we believed the EXPE share price had a greater chance of decreasing than increasing and would continue to fall over the trading period. We set both strike prices in a relative proximity, as we believed EXPE share price wouldn’t decrease much over a three-day period. Our risk analysis suggested we were exposed to a high Gamma and Vega. Which would affect our share price as noted below. This volatility was hedge with the implementation by going long and short calls options. Trading strategy Bear: Risk ExposureTrade Details Impact on option share prices

Type Option contracts

Strike Price/share IMV -1% IMV

1% IMV -3% IMV

3% IMV

Call Long

50 $130.00 $3.09 34.55% $3.00 $3.18 $2.83 $3.35

Call Short

50 $128.00 $4.05 32.70% $3.97 $4.13 $3.81 $4.30

Performance analysis:EXPE stock price dropped, as did IMV that increased the price of our short call option contracts. Our aim was for the EXPE share price to drop to and below $128, which succeeded. We generated $577.54 profit from our decreasing market expectation. We hedged our risk by simultaneously going Long and Short calls option contracts. If market valuation were to increase we would have made a loss but the increased price of the Long call options would have limited the loss we potentially would have made.

Bear spread

    10/11/2015 13/11/2015  

$577.54

Long call option contract

Strike: $130.00 Expiry:

20.11.2015 50 $309 $-15,437.62 50 $180 $9,000.00 $-6,437.62

Short call option contract

Strike: $128.00 Expiry:

20.11.2015 50 $405 $20,265.16 50 $265 $-13,250.00 $7,015.16

Overall performance:Over the trading period we realized a profit of $ 5,376.92. All of our strategies incurred a profit as noted in the final profit and loss below. We were confidant in each strategy that we could justify our reasons to implement the strategy but also identify the risks associated with it and therefore adjust our position to those certain risks. We based our strategies off calculated risk analysis and current market information. We benefitted from a long volatility strategy with expected increases in volatility and shorting calls. Secondly we based our strap off current market information that we hedged risks associated with a semi-strong/strong form efficient market. Our third strategy was contrastingly bearish as EXPE shares feel dramatically in a short period. To protect our position we deemed it necessary to implement a bear spread that resulted in a positive fashion. Overall we were happy with how we conducted our operations but felt a better understanding of the risk would have provided us with a more efficient trading period.

Final Profit & Loss Calculations $- Strap $ 3,090.00- Long Volatility $ 1,709.38- Bear Spread $ 577.54Realised profits = $ 5,376.92Bibliography:

1. Bloomberg.Com terminal, University of Limerick 2015

2. Class Notes Dr. Finbarr Murphy 2015

3. Expedia, Inc. (EXPE) Earnings Report Date - NASDAQ.com. 2015. Expedia, Inc. (EXPE) Earnings Report Date - NASDAQ.com.

4. Expedia, Inc. Share Price | EXPE- Yahoo! UK & Ireland Finance. 2015. Expedia, Inc. Share Price | EXPE- Yahoo! UK & Ireland

5. Finance.Expedia, Inc. (EXPE) Dividend Date & History - NASDAQ.com. 2015. Expedia, Inc. (EXPE) Dividend Date & History - NASDAQ.com. 

6. Efficient Market Hypothesis (EMH) Definition | Investopedia. 2015. Efficient Market Hypothesis (EMH) Definition | Investopedia.