Priceline Group Inc (NASDAQ:PCLN) is a well-managed company that in the long run should remain a winner. I like going long PCLN stock any meaningful dips.
Click to Enlarge But in this uber-bullish market, dips are fleeting.
Priceline stock hit a new high in November. Since then, though, it has been choppy, and PCLN now sits on a lower-high trendline. It has the opportunity to break through it. If it does, it usually invites momentum buyers for another push higher. The ideal target of the breakout should have enough oomph to challenge the highs.
I usually like to go long PCLN stock after a string of bad days, but this resilient market has presented very few dip opportunities. So in this case, I will (admittedly) jump the gun to capitalize on this potential technical breakout.
Priceline stock, at $1,535 per share, costs a fortune to buy in bulk. So instead of putting that much at risk at current prices, I will use the options market.
There are hundreds of ways I can set a bullish trade for PCLN, but I’ll keep it simple here. This is how to make a near-the-money debit call spread, putting you long Priceline stock with defined risk.
How to Trade PCLN Stock
The trade: Buy the PCLN Mar $1,535/$1,540 debit call spread for $2.15 per contract. This is my maximum potential loss. Ideally, I need PCLN to rally past both legs of my spread. If so, then I stand to essentially double my money.
Options are time-sensitive, so I want to give myself time to be right. Priceline reports earnings mid-February, so I could have used the February contract instead of March. But this would leave me almost no time to manage my spread after the earnings. Using the March contract makes it a slightly slower-moving trade, and therefore easier to manage.
I usually like to mitigate my out-of-pocket risk by selling risk on PCLN options. But it is important to note that Priceline is a fast runner. This momentum stock can move $100 per day without much reason. So I will delay entry into any credit spreads to finance the trade; I may not even need it.
Since this trade’s outcome will likely depend heavily on the outcome of their earnings, I classify it as a lotto trade. This makes it of medium conviction, so I won’t make too big for not to break my heart if it goes against me. Earnings is a binary event for any stock. The short term reaction to the earnings is a complete coin flip regardless of the quality of their report.
I am not required to hold my trade on PCLN stock through the expiration. So, if I see meaning gains before the earnings I will book them.
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.