Priceline Group Inc (NASDAQ:PCLN) is the poster child for all momentum stocks. I’ve seen it move $100 per day on little news. It’s also one of a few tickers which trades above $1,000 per share, which makes it out of reach for most investors.
Luckily we have Priceline options to position against PCLN stock moves with less risk.
Today, I will share a trade that is not for all risk profiles, so I present it in two forms — one that is less risky than the other. Selling options is definitely risky to begin with, so I only do it if I understand the trades and the risk associated with them. This is especially true when trading a high-premium stock like PCLN.
PCLN Stock Trade Idea
Click to Enlarge The Bullish Bet: Sell PCLN Jan 2018 $1,180 put. This is a bullish trade for which I collect a whopping $26 per contract to open. This trade’s 28% buffer from current price gives me a 90% theoretical chance of success. I need Priceline to stay above my sold put to win. If so then I keep the premium I collect. I only sell naked puts if I am willing and able to own PCLN at the strike I sold.
Usually I like to hedge my bet. In this case I will sell the opposite risk against Priceline stock with PCLN options.
The Bearish Bet (Optional): Sell PCLN Jan 2018 $2,300 call. This is a bearish bet for which I collect an additional $16 per contract to open. Out of fear of this uber-bullish equity market, I made more room to the upside than the downside. The upside buffer is almost 40% and gives me a 90% statistical chance of success.
Taking both trades would put me in a PCLN sold strangle with a potential of $42 in premium income per contract. I need Priceline stock to stay between $1,180 and $2,300 per share through the year.
To make this trade less risky and taxing on margin requirement, I can modified it into a sold iron condor to fit a less aggressive risk taste.
The Modified Bullish Bet: Sell PCLN Jan 2018 $1,220/$1,200 credit put spread. This is a bullish trade for which I collect $3 per contract to open. This trade has a slightly smaller buffer than the more aggressive version for reasons to become obvious below.
The Modified Bearish Bet (Hedge/Optional): Sell PCLN Jan 2018 $1,980/$2,000 credit call spread. This is a bearish bet for which I collect an additional $3.50 per contract to open. It is very important to note that this modified version has a much lower theoretical chance of success since the buffer from current price is only 20%.
Since I can only lose on one side or the other, this iron condor sold could ideally yield about 30% on money risked.
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.