Earlier this month, we closed the last half of our position in Vail Resorts (NYSE: MTN), a leader in winter resorts, for a nice 206% gain. With the 65% return we made from the first half, this trade handed us an average profit of 135%.
That’s all thanks to Vail’s clear seasonality. The company’s share price has a history of climbing as we head into winter. And the snowier the forecast, the better. When early snowfall hits, Vail starts opening its ski resorts ahead of schedule — so investors rush into the stock in anticipation of the boost to Vail’s earnings. The stock soars.
But what goes up, must come down.
Once all of that excitement is priced into the stock, the share price has historically pulled back going into the new year. It’s Vail’s other big seasonal pattern — and it’s why we’re going back into the stock today, this time with puts.
Essentially, this is a buy-the-rumor/sell-the-news trend. Investors bought the rumor of a good winter season, which pushed Vail’s share price higher over the fall. Soon it’ll be time to sell the news: that winter, indeed, has been good to the company. It’s a typical Wall Street strategy.
So, today, let’s bet on Vail’s coming fall by purchasing the January put options:
Action to take: Set a Good ‘Til Canceled limit order to buy to open the MTN January $130 put option (MTN160115P00130000) at $3.10. At last glance, it was trading at $2.75. If your order is not filled by next Thursday, I will update you on the trade.
Please note: Do not place a market order. Make sure to set the limit order at $3.10. If you aren’t sure how to do that, just watch my video “How to Place an Options Trade” by clicking here.
Once this order is filled, place the following order:
Action to take: Set a Good ‘Til Canceled limit order to sell to close the MTN January $130 put option (MTN160115P00130000) at $6.20. Keep this order open until filled.
This second order will allow us to collect a 100% gain in the event that a quick and unexpected spike happens before I can get a trade alert to you.
Vail’s seasonal drop has been prominent for the past five years. The only year this trend wasn’t quite as strong was in 2013, but that was tied to a winter that failed to live up to its heavy-snowfall forecast — something we don’t have to worry about this year, given the significant snow that’s already fallen in Vail’s operating regions and the snowstorms Chris Orr sees coming down the pike. If you didn’t get a chance to read his updated winter forecast, you can read it here.
Since June, the stock has been rallying and is now up 24%, giving us the ideal setup to benefit from the imminent pullback.
We are buying the January put options this time even though this captures a shorter period than the length of Vail’s typical downtrend, which can last for a few more months. But the next options are in April, and those are way too expensive at the moment … which is the reason our play on this downtrend didn’t work out last year, even though the stock displayed its seasonal weakness. We ended up overpaying for the April option, so despite the stock falling nearly 7%, we failed to see a significant spike in our options. This year, it makes more sense to grab the January options, which will still capture the trend and for a lower cost to boot.
As you can tell, I expect this to be a relatively short-term trade. If the trend holds, we may be out of this in just a few weeks. So pay close attention to your inbox.
Update on Toro Corp.
As a quick reminder, our protective stop-loss order for our Toro calls was triggered on December 4. Our stop was hit at $5.60, despite our $6.90 order price, since the option only traded at $5.60 that day, so we ended up collecting a 100% gain from this half of the trade.
As you can recall, we closed the first half in September for a 100% profit, so Toro’s uptrend has clearly played out nicely for us. If your order was not triggered, go ahead and close it at the market. At last glance, the option was fetching $7.70.
Until next time, good trading…
Editor, Precision Profits