What happened
For the second day in a row, shares of virtual hospitality provider Airbnb (ABNB -1.98%) are rallying as options traders (folks who buy the right to buy or sell a stock rather than just buying the stock itself) crowd into new positions.
So what
Airbnb is a new IPO -- in case you haven't heard -- and today is only the second day options contracts have been available for traders to play with. As StreetInsider.com reports this morning, they're trading these options with abandon.
"Calls" (which give the trader the right to buy a stock at a set price in the future) are outselling "puts" (which allow a trader to sell his or her stock at a set price) by a 2.4 to 1 margin. And what this basically means is that...Airbnb stock is really popular right now.
Which is basically what the rising stock price -- now up 10.3% in 2 p.m. trading -- is telling us.
Image source: Getty Images.
Now what
Why is the stock so popular? For one thing, it's "got momentum."
If Airbnb holds onto the gains it's already got and closes today above $150, this will be the stock's highest closing price since its IPO. That alone is enough to get momentum traders excited. They'll also be betting, furthermore, that the stock can go even higher -- perhaps as high as the $165 it reached in intraday trading on its IPO day.
Does Airbnb deserve to trade so high? Not by conventional measures, certainly. At a valuation of $89.4 billion, the stock costs more than 18 times the revenues that it collected in 2019 -- before coronavirus arrived and ruined the economy. Even assuming the new COVID-19 vaccines work, and coronavirus goes away sometime in 2021, the stock looks pretty pricey at current levels. (And remember, we're just talking about sales so far. Valued on earnings or free cash flow, Airbnb has no earnings or free cash flow. It's even more ridiculously overvalued on either of those metrics).
Long story short, even if today's rising stock price wasn't being driven directly by options traders, it would be hard to call Airbnb stock anything other than a momentum play. It's an "investment" per se but simply something for traders to speculate on and definitely not something that beginning investors should be considering.
