2nd Trade Update PCLN: Taking it off for a gain

by Dan February 28, 2012 9:40 am • Commentary

Trade Update Feb 28th, 2012 10:00am

With the front month straddle at parity this trade structure is essentially a short delta position at this point. I’m going to take off the trade for a small profit at 12.60. This was a nice structure in that it was basically betting against an outside move in the stock, but capping the losses in case that scenario happened. In fact, the stock didn’t really cooperate, going pretty close to that area where the trade would start losing money, yet we are able to emerge with a small profit. So it was a structure with a lot of chance for success. With that in mind, it’s good to take your money and run. We’ll look to do similar structures like this in the future.

Exit: Sold the strangle in apr at 28.40  and bought back the straddle at 41.00

So sold the entire structure yesterday at 14, bought it back to close this morning at 12.60 for a 1.40 profit. Would like to have done better but the stock didn’t cooperate and yet was still able to get out with a small gain.



Trade Update Feb 28th, 2012:  PCLN reported a very strong Q4 and guided above most street estimates for Q1.  Shorts obviously covering here, can’t imagine why new longs would buy here…..I think the stock settles in here a bit. The March2nd weekly straddle that I sold at 43.80 (with stock at 629.50 the straddle is offered at 36.50 is nearing parity. April vols are holding in better than expected for now and I may want to hold onto this and look to turn into a call spread.  Or, when the the March straddle comes in a bit with a downward move in the stock, I may look to take the small gain.  

Apr implied vol worst case we were thinking was 26ish, but vol on the 640 strike opened around 27.5 and has actually ticked higher to 28.20 in the first 15 minutes.  The market has had more buyers of premium to start the day, which is not entirely surprising given the fact that the stock is at all time highs I will continue to monitor.   So very soon we may look to take the spread off as March has come in as expected and April ahs acted better than expected.


Original Post Feb27th 2012: Report Q4 After the Bell, Our Preview

PCLN ($595 )   Bio Here     New Trade Below

-Report Q4 after the bell, the options market is implying about a 8%* move which is basically inline with the 4 qtr average move of about 7.3% and the 8 qtr avg of about 10%.  Of those 8 moves in the last 2 years only 2 have been lower and both have been following the Q1 report. (with the stock at $595, the march 2nd weekly 595 straddle is offered at about $46.50, that is the move you would need by Friday’s close to break-even if you bought it, or about 8%)

-Wall Street analysts are overwhelmingly positive on the stock with 18 Buys, 3 Holds, and only 1 Sell while short interest isn’t insignificant at about 6.20% of the float.  

-Implied volatility in the name is obviously elevated heading into the print, with the 30 and 60 day implied vols at about 44 and 38 vs the 30 and 60 day realized vol of about 24 and 27 respectively.   The most active options today are the March2nd weekly 650 calls and the March 2nd weekly 530 puts with about 1400 of each trading as of 12:30pm.

Price Action/Technicals: the stock has massively outperformed the SPX and the Nasdaq up 27% ytd, and EXPE which is up about 15% ytd.

-Technically the stock has broken out of a massive 1 yr base btwn $450 and $550 and apparently on a run-away breakout to levels not seen since the internet bubble more than 10 years ago.

[caption id="attachment_9106" align="aligncenter" width="300" caption="1 YR PCLN chart from Bloomberg LP"][/caption]


Do levels not seen since 1999/2000 make you get a nasty case of vertigo??

[caption id="attachment_9107" align="aligncenter" width="300" caption="13 yr PCLN chart from Bloomberg LP"][/caption]


VALUATION:  While the $595 price tag is eye popping, the PE at 20x expected 2012 earnings is not as they are expected to grow 31% this year and 21% next on expected sales growth of 24% and 18% respectively in 2012 and 2013.  For comparison sake, EXPE trades at 12x 2012 expected earnings, but the Street is not looking for any growth in earnings on sales that are expected to grow 8% yoy.  Hard to make a case to short on valuation.

MY TAKE: reading through a few quarterly previews (2 below) it becomes clear that the street is obviously expecting a beat and raise tonight…..even the bulls have conceded that while EXPE’s results and commentary on Feb 9th 2012 could be read as nothing less than bullish for PCLN,  the company’s disproportional earnings exposure outside the US and their considerable FX risk leaves the chance for cautious guidance.  The stock is clearly priced for perfection at current levels and I can’t for the life of me think why anyone would want to initiate a new position in stock like this that is up 27% ytd has moved about 10% on avg over the last 8 quarters.

Listen, the idea of being contrarian for contrarian sake is getting a little played out, I get it, but some of you want to make bullish bets as you think the stock can just crush shorts and melt higher……and I get that too, that’s just not my game…..


TRADE:  THIS ONE IS A BIT COMPLICATED AND NOT FOR BEGINNER OPTIONS TRADERS…I  want to sell the weekly at the money straddle that seems ridiculously expensive and cover my wings by Buying the much cheaper April 550/640 Strangle.

PCLN ($593)  Sold March 2nd weekly 595 straddle at 43.80 to Buy the April 550/640 Strangle for 29.80,  Received 14.00 Credit for the Package

-Sold 1 March2nd weekly 595 call at 21.00

-Sold 1 March2nd weekly 595 put at 22.80

-Bought 1 April 640 call for 14.40

-Bought 1 April 550 put for 15.40

Break-Even on March2nd weekly Expiration:  This is going to be a bit complicated to lay out, but there are basically 3 scenarios, 1st stock under-performs implied move, 2nd stock moves in line with implied move and 3rd stock moves outside implied move.

1st: If stock doesn’t move much then the straddle I sold expires for the difference btwn the current stock price, the price of the straddle that I sold….the April Strangle will decline in price (April vol prob declines about 20-25%) but should be offset by the gains of the straddle where the vols should get destroyed and then time value rapidly decays.  In this case on Friday prior to expiration I would look to turn one or both legs of the April Strangle into a vertical spread.

2nd: If the stock makes a move that is priced into the options then the short straddle trades for intrinsic value and the long strangle loses about 20% of implied volatility. This scenario is probably about a break even to a slight loss on the trade.

3rd: If the stock outperforms the implied move, the short straddle trades at its intrinsic value, but the long strangle begins to outperform as premium in April will not come in as much and the now near the money wing retains some premium.


Execution PSA:  when trading options that are this high from a dollar perspective, they will also have large spreads, especially when trading multiple legs, it is imperative that you use limits and do not pay full bid ask.


Broker Previews:

Bank of America Merrill Lynch who rates the shares a Buy with a $630 12 month price target had the following quarterly preview in a note to clients dated 2/22/12:

Expect anther solid quarter driven by stable Intl bookings

Priceline due to report 4Q on 2/27. Based on strong hotel counts, industry data and Expedia’s read-across, we expect upside to Street at rev./EPS of $974mn/$5.06. Given ~25% YTD stock appreciation, we believe investors are looking for a 4Q beat in the $5.25-5.40 range (which we see as achievable) with organic FX-neutral Int’l bookings growth near 60% y/y (vs. 61% in Q3). However, despite stable 1Q revPAR, we believe 1Q and 2012 EPS will be pressured a bit by FX. We expect 1Q EPS guidance in the range of $3.70-3.90 vs. Street at $3.73.

Expect modest deceleration in 1Q Intl. bookings outlook

Industry data suggests Europe RevPAR is stable in Jan; we anticipate Priceline to guide somewhat cautiously on 1Q Int’l bookings and wouldn’t be surprised with a guide at 42-47% growth (with eventual results around 55%). We think Priceline’s secular growth story is on track given strong hotel additions with Booking.com getting strong hotel traction in Asia, LatAm, and US. We expect ~182K 4Q international hotels vs. our 177K est. (with ~194K hotels currently on the site).

Expedia 4Q results a positive read across for Priceline

EXPE’s ADRs were up just 2% in 4Q vs. 7% in 3Q, but FX and geographic mix were primary drivers of the q/q ADR decline with core ADRs stable. Expedia also indicated: 1) European room night growth was stable in the mid-teens while APAC accelerated; and 2) some weakness in Europe was likely company specific. In our Priceline model, we have4Q Int’l room night growth decelerating 1,000bps q/q, and given potential q/q boost from Asia seasonality, this seems too conservative.

Maintain Buy – still our favorite large cap. in group

Priceline’s commentary on bookings growth in Asia/SA/US could be a positive for stock with the Euro macro outlook the biggest swing factor. While there may be risk to 2012 Street estimates due to FX, stock multiple at 20x 2012E EPS is at a discount to our 2012 expected 23% gross profit growth (we assume Euro at $1.28), which we view as conservative. Priceline’s PEG ratio of 0.9x is a large discount to the eCommerce group average of 1.4x. Maintain Buy and $630 PO.


JPM who rates the stock a BUY with a 12 month price target of $670 had the following quarterly preview in a note to clients dated Feb 24th , 2012:

Priceline is reporting 4Q11 earnings after the close on Monday, February 27. Despite some European pressures and FX headwinds we expect International bookings to remain strong and drive upside to our estimates. We recognize that Priceline shares are up 26% YTD—that creates a higher bar into earnings and Priceline is likely to remain conservative in its 1Q12 outlook. However, Priceline remains 1 of our top 2 picks in the Internet space in 2012 (along with Amazon) based on Booking.com’s continued share gains in Europe along with newer growth drivers in APAC, LATAM, and the U.S. Additionally, we believe room for further multiple expansion (and earnings upside) remains as Priceline currently trades at 15.3x our 2013 PF EPS of $38.36.

Expecting strong 4Q results despite FX. The average 4Q11 Euro/$ exchange rate of ~$1.35 was 2% below Priceline’s guidance of $1.38. Ex-FX, we look for gross bookings growth of 43.4% and int’l bookings growth of 55% Y/Y. We expect 4Q net revenue of $982M (+34.3% Y/Y), in line with consensus of $980M and ahead of guidance of $929-$965M, as we expect Booking.com to continue share gains. Our EBITDA estimate of $329M is slightly above consensus at $327M and at the top end of guidance. Our PF EPS estimate is $5.05, a penny below consensus, but we would expect upside based on stronger overall bookings—possibly to $5.25+.

OTA laterals encouraging for the hotel business. Expedia reported 4Q int’l bookings +14.7% Y/Y, +19.1% room night growth, and +2% ADR growth. Lower than expected revenue margins were attributed to softness in the air business offsetting strength in Hotels.com. While less of a read-through, Orbitz reported similar 4Q dynamics, citing weakness in air and packages partially offset by strength in hotels, particularly in eBookers.

Solid 4Q results and outlook from hotels. Marriott and Starwood reported solid RevPAR growth in int’l markets, particularly in Asia, despite European macro concerns. Softness in the European travel market in 2012 is expected to be partially offset by the Summer Olympics and we believe there may already be some early signs of European stabilization. Marriott is forecasting 2012 RevPAR growth of 5- 6% (NA +5-7%, Int’l +4-5%), in line with Starwood at 5-7%.

What to watch for: 1) impact of European macro; 2) Booking.com traction in the U.S.; 3) growth in APAC and LATAM; 4) any shift in U.S. marketing strategy toward Booking.com; and 5) any changes in search traffic competition.

Valuation. Our $672 price target is based on 17.5x our 2013PF EPS of $38.36