I always say that Priceline Group Inc (NASDAQ:PCLN) is the poster child for all momentum stocks. Today, PCLN stock is up 6% on a favorable earnings reaction.
This wouldn’t be the first time Priceline moves this much in one day, and it certainly won’t be the last.
Today, I’ll set a mid-term trade that should profit from a range in PCLN’s stock price.
Before you send in the posse after me, understand that I’m not shorting Priceline stock. I believe in its fundamentals long-term. I’m just finding a range within which I think PCLN will trade through fall of this year.
How to Trade PCLN Stock Here
The short: Sell the Oct $1,990/$2,000 credit call spread. This is a bearish trade for which I collect $2.5 per contract to open. This is my maximum profit. The 14% price buffer gives me an 80% theoretical chance of success. If Priceline stock stays below my sold spread, the trade would yield 30% on money risked.
I am not crazy (you’ll have to take my word for it), so I have to balance this trade out. So I will sell opposing bullish risk in PCLN.
The hedge: Sell the Oct $1,480/$1,470 credit put spread. This is a bullish trade for which I collect an additional $2.50 per contract to open. This side has a 90% theoretical chance of success. And if this side is successful, it would yield its own 30% on money risked. If PCLN stock continues its upward move, I would skew this iron condor to be two longs to one short so I can mitigate the upside risk.
By taking both sides even, I would then have sold an iron condor and collected a total of $5 per contract. And since I can only lose on one side or the other, if PCLN stock stays between both spreads sold, I would collect 100% yield on risk.
The price buffer for this iron condor is +/-14%, but with Priceline, I expect that I would need to manage the risk at some point.
I am not required to hold any trades open through expiration. I can close any of them for partial gains or losses.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.