Priceline Group Inc (NASDAQ:PCLN) is a highly priced ticker. This is not the same as saying that it’s expensive — although at a 40 price to earnings ratio, it’s not cheap in absolute terms. But it is cheap relative to its competitors. From that perspective, PCLN is 30% cheaper than Tripadvisor Inc (NASDAQ:TRIP) and 15% cheaper than Expedia Inc (NASDAQ:EXPE).
Coming into this earnings report, PCLN stock had enjoyed a 30%-plus rally. This nasty reaction will surely shake the longs. This is also a momentum stock, so it will scare many from trying to catch it. So a move this big is not likely to be a one day event.
Nevertheless, today I want to take advantage of the juicy premiums to set a bullish bet that the selling will abate soon enough. The idea is to find proper support levels to generate income or enter the stock at a discount even much lower than here.
Click to Enlarge Technically, PCLN stock on this dip triggers a bearish technical pattern and fills its potential at the same time.
The loss of the neckline around $1,820 per share invites sellers to retest the $1,690 zone. And here we are close enough to it but it’s not guaranteed to be the end of it. There are several other technical patterns with potentially lower targets.
The question is now what? It seems that PCLN management likes to build in some bad news to pad its future expectations. This time the punishment is harsher than many expected, but I don’t think it’s time to call it a dead bet. Back in August, I shared a similar trade that delivered over $10 in profits.
Expectations on Wall Street were definitely not expecting this setback. The average price target there is $2,111 per share. In theory one would think that this is upside potential, but I fear that this time some may be tempted to reset their targets lower. Although this is not a prediction, this is a possibility that I have to consider.
Priceline stock is the mother of all momentum stocks. It moves $100 for no reason, so catching it as it’s falling 9% is dangerous business. So I keep the size of my bet small enough to not break my piggy bank.
PCLN Stock Trade Idea
The Trade: Sell the PCLN Mar 2018 $1,360 naked put and collect $10 to open. Here I have a 85% theoretical chance that I would retain maximum gains. But if the price falls below my strike, then I accrue losses below $1351.
Selling naked puts carries big risk especially for a stock as expensive and as volatile as this. For those who want to mitigate it, they can sell a spread instead.
The Alternate Trade: Sell the PCLN Mar 2018 $1,380/$1,360 credit put spread, where I have about the same odds of winning but with much smaller risk. Yet the spread would yield 10% if successful.
It is important to note that today’s trade doesn’t need a rally to profit. I simply need support for PCLN stock to hold for the near term. Time will then do the heavy lifting and premiums will expire in my favor. But just in case, I have to be ready to own the shares at that level.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose
Get my newsletter for free 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 as @racernic on twitter and stocktwits.
