UPDATED: PCLN Q4 2010 Earnings Report Tonight Post Close-If You Are Long Protect Gains Into What Could be Volatile Report

by Dan February 23, 2011 3:00 pm • Commentary

[private][private]EVENT: PCLN Q4 2010 Earnings Report Tonight Post Close

PCLN is one of the last of the Nasdaq high-fliers to report their Q4 earnings tonight post close.
-Options market implying about a 11% move after earnings, which is basically in-line with the 8qtr avg move of ~11%…….
-whats interesting about the avg move is that only 2 of the 8 moves were less than 8% and 4 were greater than 12%……

PRICE ACTION/SENTIMENT: stock is up ~6% ytd even after this past weeks sell off of ~8%. Even with the stock up almost 100% in the past year, the street is decidedly positive on the name with 16 buys, 5 holds and no sells.  But interestingly investors may be a bit more cautions than wall street analysts, in the latest 13f filings 15 of the 20 top holders trimmed their PCLN positions while only 5 added (of those that added only the top holder added in a meaningful way, ~15% of their Q3 holding.

MY VIEW: I don’t buy stocks up 100% in a year and i tend to be just a tad skeptical of stocks up 700% in 3 years…unless they cured some rare decrease the stock could not be at a realistic valuation and the laws of Physics are likely to take hold at any moment…..But being a constant contrarian i almost certainly miss out on being long stories like this, so feel free to take m y view with a grain of salt!

EXPE reported 2 weeks ago and disappointed on earnings due to increased spending on advertising and marketing….stock is off 20% since then.


SELL the March 455 call at ~13.00 to finance the Purchase of the

March 425/390 Put Spread for 13.00

(Buying 1 Mar 425 Put for 23.00 and Selling 1 Mar 390 Put at 10.00)

Break-Evens On March Expiration:

-Upside: Btw 425 and 455 you have the gains or loses of the stock, AT 455 (up 6%) your long stock is called away

-Downside: btw 425 (down less than 1%) to 390 (down ~8.5%) your long stock is protected

-WORST CASE: stock below 390 and you have no protection but you have mitigated $35 in loses.

UPDATED-Feb24 12:30pm: PCLN delivered very good results last night and the stock is trading at around 455 up $28 (~7%) making highs not seen since April 2000 (does that scare that crap out of anyone else???)  So as usual i wanted to be a little defensive with long positions heading into the earnings report and if you had put on the Put Spread Collar detailed above you would have lost about $12 in the structure, but made $28 in your stock, so the net of it is that you are up$16 today…now on some levels that kind of stinks because you are long presumably becasue u think the stock is going to continue to go higher based on strong earnings trends, but i contend if you are going to be long stocks like this it makes sense to trade options tactically around the position into potentially volatile events.

-So the net of it is, you gave up some upside to protect $35 of downside through March expiration…..when stocks go parabolic and you don’t want to sell for tax reasons structures like this should help you sleep at night around such events…..

-So what to do now if you put this structure on before the earnings? at this point it depends on where you think the stock is going for the next few weeks……

a.if you like having the protection because you are mildly under-whelmed by the move (which was ~4% shy of the implied move) than leave it on and know that you risk being called away on March expiration.

b.if you are a raging bull in the name and on the market than take it off and know that there was a trade off for not making all $28 into the event.[/private][/private]