Priceline Group Inc (NASDAQ:PCLN) stock came into its earnings at all-time highs. But it fell 7% on Wednesday’s event as a reaction to the results, even though it beat on top and bottom line. This seems disastrous, but this is a stock that rallied 45% since November. Nothing rallies for ever. Dips are necessary in any uptrend.
While Priceline stock has a big price tag, it’s actually cheaper than it’s high-profile competitors. Both Tripadvisor Inc (NASDAQ:TRIP) and Expedia Inc (NASDAQ:EXPE) have price-earning ratios 40% and 80% higher than that of PCLN.
It is interesting to note that both TRIP and EXPE flipped from deep red to 2%-plus yesterday. EXPE may be in the red this morning, but yesterday’s action is an indicator that the appetite for the sector is alive and well. So eventually, the bids will come back into PCLN. I remember the dip on the May report. Then I shared a trade that delivered $3.50 of income out of thin air. Today I am looking for similar setups.
Like I said the last time Wall Street ran away from PCLN stock, a timid guidance statement is not a deal-breaker for me in the long run. So I am willing to own PCLN much lower than here. As long as the macroeconomics don’t change, I bet that PCLN will find support below which I can sell puts for income.
Click to Enlarge Technically speaking, it is never ideal to chase stocks when they’re at all-time highs. PCLN stock is coming off a 40% rally since January and 110% rally since the February 2016 lows. This is impressive especially for a stock with a four-digit price tag.
The 7% drop means that it sliced through the whole ascending regression channel in one candle. All this around some important trend lines. Although not hard lines in the sand, these matter to professional traders.
PCLN stock is the mother of all momentum stocks. When it moves in either direction it can be scary. On the way up it always seems like it’s due for a pullback. And on days like Wednesday it appears to be a falling machete staring into an abyss.
In either case, most traders would be scared out of participating in PCLN stock. That’s why I use options instead. There I can build buffers that make the risk easier to bear.
Today’s thesis is that the PCLN stock will find footing as long as equity markets in general hold. I am not relying on a rally to profit. I just want stabilization through 2017.
The Bet: Sell PCLN Jan 2018 $1585 put and collect $18 to open. Here I have an 85% theoretical chance that price will stay above my strike for maximum gains. Otherwise, I must own the shares and I would accrue losses below $1,567.
Selling puts especially in high dollar ticker requires a lot of margin. But I could accomplish the same goal selling a spread instead. There the risk is limited to the width of the spread less what I collect to open it.
The Alternate Bet: Sell PCLN Jan 2018 $1585/$1580 credit put spread where the risk is much smaller. If successful, the spread still delivers 10% in yield.
In either case I have a 15% margin of error, which is much better than risking $1900 per share here at face value and with no room for error expect higher prices.
Investing in the stock market is risky, so I only bet what I can afford to lose.
Learn how to generate income from options 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.
