Priceline Group Inc (PCLN) sold off sharply on its earnings report about a week ago — a drop of more than $130 in PCLN stock was much bigger than what the options markets had expected.
Fundamentally, Priceline is a well-managed company with a proven track record of growth and profitability. Its businesses have global reach and should thrive in an environment where global central banks are in stimulus mode. PCLN stands to benefit from the eurozone’s commitment to long term quantitative easing policies.
Some pressure to PCLN’s stock price could come from some who perceive Priceline as a momentum stock with frothy valuation. But right now, there are no plainly obvious company-centric issues.
Although it fell sharply, PCLN stock bounced off the $1,260 area. This was technically important because $1,260 was prior resistance and now can become forward support. This support could serve as a base from which Priceline can recover to higher levels.
Should the support break down, PCLN stock would be vulnerable to another precipitous decline, as it is a proven fast-running momentum stock.
Click to Enlarge When a quality company’s stock price falls significantly but without specific fundamental reasons, I look for opportunities to initiate new longs. At $1,283 per share, PCLN’s stock price sure isn’t cheap, making it a difficult stock to trade.
Luckily, the options market provides us with cheaper ways to go long PCLN with smaller risk.
Options are time-sensitive, so I want to give myself time to be right. The easiest way to bet long on PCLN is to buy a call spread. The Apr 2016 $1,395/$1,400 debit call spread is a good candidate for the trade. To buy it, I pay $1.50 per contract, which is my maximum potential loss. If in the next 148 days Priceline stock price moves past $1,400 per share, I stand to gain up to $3.50 per contract.
I can further reduce the entry cost by selling a put far below the current PCLN stock price. For example, I can sell the Apr 2016 $860 put and collect $4.20 per contract. The compromise for selling this put is that it also adds risk to my trade. If PCLN falls below $860 per share in the next 148 days, I am obligated to buy Priceline stock at $860 regardless of how much lower it falls. Anything below $860 per share would be additional loss. So when I sell the put, I am intending to own PCLN stock at that price, which is 30% lower than it is at the moment.
While I believe that PCLN has good long-term prospects, its stock price won’t be spared if markets in general tank. So, I could choose to enter the debit call spread now, then sell the put at a later date, thereby spacing risk entry points.
There are hundreds of other ways to enter into a long PCLN trade, but I like to keep it simple. I buy this April call spread to make time my enemy, then sell the put so I can put time to work for me. All told, that neutralizes the time element and allows me to go long PCLN with minimal hard costs.
As of this writing, Nicolas Chahine did not hold a position in any of the aforementioned securities.
More From InvestorPlace
- Why Apple Will NEVER Buy Tesla (AAPL, TSLA)
- Friday’s Vital Data: CHK, INTC and NFLX
- The Time for Bond Bears to Strike Is NOW! (TLT)