After volatile after hours trading, PCLN has settled in, up around 4% on earnings. The stock is within our 990 / 1090 range that we targeted with our iron condor trade yesterday. While we think the stock is likely going to end up between those 2 strikes by next week, we decided to take the trade off today because of the recent volatility we’ve seen among the momentum stocks in the market.
Rather than sweat out $5 of extra premium, we’ll take the bulk of the gains from the one-day vol crush this morning, and move on other trade ideas.
Action: Bought to Close PCLN ($1067) Nov15th 990/970, 1090/1110 Iron Condor for $5 for a $6 gain.
Original Post Nov 7th, 2013: Adult Swim Trade $PCLN – We Name Our Own Price
Unlike many of the other momentum winners in 2013, much of PCLN’s advance has not been on large earnings gaps, but rather gradual, steady appreciation. As we detailed in yesterday’s earnings preview, the stock has only averaged a 4.5% earnings move over the last 4 quarters.
We laid out our fundamental and technical thoughts in the preview, with this key takeaway:
PCLN has been a major winner, but the stock’s gains have been underpinned by very admirable earnings growth. The company has become THE travel behemoth in the online space, and has reaped the rewards as a result.
While earnings expectations are high (16.22 in EPS consensus), EXPE’s recent strong result and PCLN’s record of executing suggest that the company could still jump over that high bar. However, we’ve seen a streak of high fliers in 2013 report decent numbers but still sell off after earnings. That clean-up in positioning seems could be the main risk to PCLN after this quarter’s report. The $990-1000 area is strong support, though, and we’d be surprised if that was breached.
It’s certainly tempting, given the dollar amounts of the options to do a short premium trade. For example, straddles in Dec are $100. That seems like alot of room in a $1000 stock.
Here are a few points we considered as we debated a potential trade on PCLN among the 3 of us:
- PCLN is relatively cheap fundamentally (34x for 20%+ expected earnings growth) compared to almost all other internet stocks, and has executed very well in the past
- PCLN has shown some relative weakness in the past couple months, similar to many other big year-to-date winners in 2013.
- PCLN was actually lower last week after EXPE’s big earnings report, which sent EXPE up 18%. That was a poor reaction from PCLN given a good excuse to rally.
- PCLN recently broke out to a new all-time high above 990, and held that level on its October test
- PCLN has only averaged a 4.5% earnings move over the past year, and has rarely gapped without some sort of retracement
- PCLN’s earnings expectations for this quarter are 30% higher yoy and 65% higher vs. Q2 2013 (vs. a 58% higher result between Q2 2012 and Q3 2012)
Add it all up, and we decided that we like playing for the range between 990 and 1090. This is a trade where a big move (that does not retrace) in either direction will mean our trade is a total loser, so this is an adult swim trade. But we like the odds and the overall setup given all those factors above:
TRADE: PCLN ($1037) Sold Nov 15th 990/970– 1090/1110 Iron Condor at $11.25
PCLN Sold Nov 15th 990/970 Put spread at $6.00
- Sold 1 Nov 15th 990 put at 16.80
- Bought 1 Nov 15th 970 put for 10.80
PCLN Sold Nov 15th 1090/1110 Call Spread at $5.00
- Sold 1 Nov 15th 1090 call at 16.20
- Bought 1 Nov 15th 1110 call for 11.20
Break-Even on Nov Expiration: If stock is between 990 and 1090 collect the entire 11 dollars for a 11 dollar profit. Gains of up to 11 between 979 and 990. Losses of up to 9 dollars if between 970 and 979 and between 1101 and 1110. Total loss of 9 dollars below 970 or above 1110.
Trade Rationale: Because this is a 20 dollar wide structure, your max risk is 9. So the best way of thinking about this trade is risking 9 to make 11 on a fairly high probability. But do know that if PCLN surprises on way or the other that 9 dollars is at risk.