Priceline Group Inc (NASDAQ:PCLN) reported earnings after hours on Tuesday, and traders are punishing it by 5% on Wednesday morning. Not surprising given that PCLN went into the report at all-time highs.
Priceline is pricey, but that doesn’t mean it’s expensive. In fact, on a price-to-earnings ratio, Priceline stock is cheaper than competitors Tripadvisor Inc (NASDAQ:TRIP) and Expedia Inc (NASDAQ:EXPE). Even on an absolute basis, paying 40 times earnings isn’t crazy given the margins and growth rates PCLN has consistently delivered.
One timid statement of forward guidance does not break the company’s long-term prospects or its long-term stock trajectory. So fundamentally, this is not a deal-breaker for me in the long run.
Technically speaking, it is never ideal to chase stocks when they’re at all-time highs. PCLN stock is coming off a 10% rally in three weeks, 30% rally since January and 100% rally since the February 2016 lows. For a stock with a four-digit price tag, this is quite a feat.
Momentum stocks of this size pose a problem to retail investors.
When PCLN rallies, it seems perpetually over-inflated. When it’s falling, attempting to catch it feels like financial suicide. Most investors need the merry-go-round to stop before they board, but alas, there is no stop button on Wall Street — trust me, I looked. I did, however, discover options where I can use time elements to slow the action enough to manage entry and exit points without needing to be surgically accurate.
Case in point: Back in February, I shared a perfectly placed iron condor that delivered nice profits. The bearish side was challenged, but that’s the point in the balance of an iron condor. After this dip on earnings, I want to re-position the risk for a different time line. I want the bullish side of the iron condor to be a more effective hedge to the bearish risk so the trade remains in balance.
How to Trade PCLN Stock Here
The Bet: Sell the Jan 2018 $1505/$1500 credit put spread. This is a bullish trade for which I collect $1 to open and where I have 90% theoretical certainty that it will expire in my favor for maximum gains.
Usually I like to sell opposing risk for balance, but in this case, the January contract does not allow for spreads smaller than $100 wide. Instead, I will stagger the risk … but even then, it’s still too risky for my taste.
The Hedge (Optional): Sell the Sep $2090/$2100 credit call spread for $2.50 per contract. It is important to note that this is a much smaller price buffer than ideal. I usually prefer a theoretical chance of success higher than 85%, and this spread only offers me 70%.
Given the lack of choices, I will delay entry into the credit call spread until I get more choices from the market makers. Until then, I am confident that I will be able to manage my bullish risk against the short-term price gyrations.
E-mail sellspreads@gmail.com with questions or join me to learn more about options in a personal 1on1 webinar here. 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.
