Name That Trade $PCLN – Q2 Earnings Strategies

by Enis August 8, 2013 12:25 pm • Commentary

We posted a PCLN earnings preview yesterday (included below), detailing our thoughts on this monster stock.  This is one of the few high flyers that does not look overvalued to us.  Valuation has not mattered for momentum names, but at least PCLN has some cushion in the event of a turn in sentiment.

Having said that, we don’t see anything that stands out to us as a great risk/reward options trade ahead of this pivotal quarter, so we’re offering up a few ideas depending on your own view:  

Playing for more upside, but taking advantage of high volatility ahead of earnings:

TRADE: PCLN ($925.50) Buy the Aug9th / Sept 975 Call Calendar for $13.00
  • Sell 1 Aug9th 975 call at $7.50
  • Buy 1 Sept 975 call for $20.50

Rationale:  The 975 strike is near the implied move for PCLN, so if it is at or below that level on tomorrow’s expiry, the weekly call will expire worthless, and you will be long the Sept 975 call for a reduced cost.  The calendar limits your one day upside for tomorrow, but cuts the cost of the Sept 975 call by about 1/3.

For Long Holders to Consider:

1. Long the stock and want to add some juice to your long in the event of a 1 day pop to new highs (targeting the implied move of 5-6%):

TRADE: PCLN Long ($922) Buy Aug9th 950/970 1×2 Call Spread for 0.40 credit
  • Buy 1 Aug9th 950 call for 14.40
  • Sell 2 Aug9th 970 calls at 7.40 each (14.80 total)

Break-Even on Aug 2nd Expiration:

-Profits of stock btwn 922 and 970. If stock 970 or above your stock is called away but you have made an extra 20 dollars (and 40c) so you have essentially sold the stock at 970.40. If stock is below 950 you collect 40c. If stock is between 950 and 970 you’ve made double on your long for that part of the move (e.g. @ 960 you’ve made an extra 10 dollars on your long).


2.  Long the stock, don’t want to sell but worried about the event:

Theoretical TRADE: long PCLN ($922) Buy Sept 910/850 put spread – sell Sept 965 call for a $1.20 credit
  • Sell 1 Sept 965 call at 22.40
  • Buy 1 Sept 910 put for 33.50
  • Sell 1 Sept 850 put at 12.30

 Break-Even on Sept Expiration:

-Profits of stock btwn 922 and 966.20, stock called away at 965, up 5% (close to implied move)

-Losses of stock btwn 922 and 911.20 and then again below 850

Rationale: This is a great structure for those worried about a breakdown to that psychologically important level of 850 after earnings.  You only risk 1% of downside for 5% of upside between now and September expiry, with the caveat that you would once again be long below 850 if the stock made a sharp move lower over the next month.

Original Post Aug 7, 2013:  $PCLN Q2 Earnings Preview

Event:  PCLN reports their fiscal Q2 earnings on August 8th after the close.  The options market is implying about a 6% one day move, which is below both the 4 qtr avg of about 8% and the 8 qtr avg of about 7.75%.

Sentiment:  Wall Street analysts are very positive on the stock, with 27 Buys, 3 Holds and 0 Sells, though the 12 month price target is only $960 given the stock’s near 50% appreciation year-to-date.  Short interest is around 6% of float, little changed in the past year.

Options Open Interest:  Open interest is evenly split between calls and puts, and the volume over the last month is also evenly split between calls and puts.  Nearby strikes with the most open interest include the Aug16th 955 and 960 calls, and the Aug16th 900 puts.  

Price Action / Technicals:  PCLN has been a huge winner during this bull market.  The stock is worth more than 20x what it was worth at its October 2008 lows, and even more than 4.5x what it was worth at its summer 2010 lows.  It is a chart that indicates incremental moves higher and then consolidation:

[caption id="attachment_28971" align="alignnone" width="649"]Weekly chart of PCLN, 100 week ma in green, Courtesy of Bloomberg Weekly chart of PCLN, 100 week ma in green, Courtesy of Bloomberg[/caption]

The long-term support is now around the April 2012 high around $775.  In the short-run, there is not really any resistance on the upside as the stock is near all-time highs.  On the downside, the $850 level is the May high that coincides with the rising 50 day ma:

[caption id="attachment_28972" align="alignnone" width="644"]PCLN daily, 50 day ma in pink, Courtesy of Bloomberg PCLN daily, 50 day ma in pink, Courtesy of Bloomberg[/caption]

Fundamentals:  Though PCLN’s stock move higher has been an amazing run, the company has actually been growing earnings at a blistering place to justify the stock’s move (a rare occurrence in this market).  The trailing 12 month P/E is in the same place it was in mid-2010, mid-2011 and mid-2012, right around 30:

[caption id="attachment_28973" align="alignnone" width="500"]5 year chart of trailing 12 month P/E in PCLN, Courtesy of Bloomberg 5 year chart of trailing 12 month P/E in PCLN, Courtesy of Bloomberg[/caption]

Last week’s earnings disappointment from online travel peer EXPE, and the downbeat commentary regarding European travel trends are likely weighing a bit on sentiment in front of PCLN’s results, but JPM had the following to say on the topic in a note to clients dated Aug 5th, 2013:

We believe many of the issues Expedia saw in 2Q were company specific. Priceline likely capitalized on Expedia’s pull-back from TripAdvisor, and continued to press Express Deals in the U.S. along with greater marketing spend. We are incorporating Kayak into our estimates and on the call we look for management commentary on Kayak’s growth profile and global expansion strategy. While competitive dynamics are driving increased sales and marketing spend across the OTA space, we are optimistic on Priceline’s ability to drive higher bookings growth that offset margin pressures, and expense comps turn more favorable in 2H13.


Volatility:  Vol has been drifting higher into the event but each event recently has seen slightly lower vol than the last. This has mostly to do with the fact that the stock is so high from a dollar perspective and the likelihood of big percentage moves decreases with higher priced stocks due to psychology. You can see this reflected in the actual volatility (blue) in the below chart as it tends to be below the IV (red) normally. Sept vol is above 30 and will likely go to the low 20’s following the event:

[caption id="attachment_28978" align="aligncenter" width="551"]Screen Shot 2013-08-07 at 8.42.23 AM from LiveVol Pro[/caption]

Trades:  Stay tuned for our thoughts on potential trade structures that we’ll be posting tomorrow ahead of the event.