Use Options to Play Priceline on the Cheap

by Tyler Craig | June 18, 2012 11:33 am

The recent consolidation in the broader market, coupled with Friday’s breach of pivotal resistance on the S&P 500 Index, have worked wonders on many charts.

While it remains to be seen whether or not a full-fledged trend reversal is in the cards, the difficult task of discovering bullish price patterns amidst the rubble has become a great deal easier.

One stock staging a recovery from its recent downturn is momentum favorite Priceline (NASDAQ:PCLN[1]).  A brief analysis of its price action of late reveals a trifecta of bullish developments.

First,  the recent lower pivot low formed on June 4 was accompanied by a higher swing low in the MACD indicator. In the land of momentum, we call this a positive or bullish divergence that indicates that the downtrend is slowing in momentum.

Second, Friday’s price surge was accompanied by above-average volume signaling a potential accumulation day.

And third, the last week and a half of sideways churn has set up a clean, high base that may portend a coming upside breakout.
Click to Enlarge

Source: MachTrader

With its induction into the $500+ club last year, Priceline now hobnobs with other rich stocks such as Google (NASDAQ:GOOG[2]), Apple (NASDAQ:AAPL[3]), and Intuitive Surgical (NASDAQ:ISRG[4]).

While joining the upper echelons of stock prices is as a milestone in Priceline’s history, it serves as a deterrent to traders with a smaller bankroll.

Fortunately, option contracts provide a seat at the table for even the most undercapitalized among us. Option-spread trades, in particular, can generate sizable returns at a cheap price tag.

The July 660-670 bull call spread looks particularly appealing for those anticipating additional upside in the broader market and PCLN.

To enter the position, traders would buy the July 660 call while selling the 670 call. The trade is entered at a net debit that represents the maximum risk and will be incurred if PCLN sits below $660 at July expiration. The max reward is limited to the distance between strike prices minus the net debit and will be captured if PCLN is above $670 at July expiration.

Over the past week, $660 has acted as a formidable resistance level. Traders might consider waiting for a break above that before pulling the trigger on the call spread.

At the time of this writing, Tyler Craig had no positions on PCLN.

  1. PCLN:
  2. GOOG:
  3. AAPL:
  4. ISRG:

Source URL:
Short URL: