Name That Trade – $PCLN: Captain Berserk?

by Enis February 20, 2014 2:35 pm • Commentary

We discussed PCLN’s incredible 5 year performance in yesterday’s earnings preview.  Priceline is a stellar internet success story, and the stock has risen along with rising earnings over the past decade.

Much of the performance for PCLN has occurred on the day after the earnings announcement.  In fact, here is PCLN’s one day earnings performance since 2009:

-2009:  Feb +16.6%, May +3.8%, Aug +14.4%, Nov +17.6%

-2010:  Feb +9.4%, May -12.1%, Aug +22.0%, Nov +8.3%

-2011:  Feb +8.5%, May -2.8%, Aug +9.2%, Nov +8.6%

-2012:  Feb +7.0%, May -5.3%, Aug -17.3%, Nov +8.3%

2013:  Feb +2.6%, May +3.8%, Aug +3.9%, Nov +4.9%

Only 4 down days, and 16 up days, with many double digit moves higher.  Naturally, as the market cap for PCLN has grown, and broader market volatility has subsided, the moves on earnings have gotten smaller.  So the implied move of 6% seems relatively fair in this context.

This was my conclusion from yesterday’s preview:

Prior to PCLN’s November earnings report, we actually put on a short volatility trade that we quickly took off for a winner.  The reasoning was that expectations in PCLN were high, but that the stock was likely to report better-than-expected results given the prior reports in the sector.

The setup this time around is similar, but the stock is at an all-time high, which we view as a more dangerous position for a volatility sale strategy, since the stock has no upside resistance.  We will look at potential trades today and tomorrow, and post our trade thoughts as well.

Since yesterday morning, PCLN has sold off about 3.5%, which changes the situation a bit.  The obvious upside level to watch is the $1310-$1315 area, which was the intraday high this week.  The support will be in the $1180-$1200 area that was resistance in late 2013.

Based on EXPE and TRIP, expectations for PCLN are relatively high.  Moreover, the company usually beats earnings expectations, so the likelihood of a big miss seems limited as well.  With that in mind, we generally prefer premium selling strategies to express the view in the stock.

Hypothetical Range Bound Trade: Buy the PCLN ($1275) Feb22nd 1210/1275/1340 Call Butterfly for $14.50

This trade is profitable if PCLN closes between 1224.50 and 1325.50 tomorrow after the event.  It does risk the entire premium on a one day event for earnings, so risky in that sense.  One alternative is to go out a few weeks to a month in maturity and keep the same strikes, and the cost would be be a little less.  Longer maturities would mean less reward tomorrow if the stock is rangebound, but little risk of losing all of the premium on one big move tomorrow and benefits from falling vol rather than just the print on earnings.

This rangebound play is interesting given the setup, but I held off since the stock has been quite volatile in the past 2 months, and I don’t want to risk premium on one day.

Hypothetical Bullish Trade: Buy the PCLN ($1275) Feb/March 1360 call calendar for $10

This trade is a bullish trade that allows you to be there for breakouts to new highs while financing that bet with the likelihood that the stock doesn’t do it entirely overnight on the earnings. Ideally for this trade the stock would be higher, as close to 1360 as possible.

Hypothetical Bearish Trade: Buy the PCLN ($1275) Feb/March 1200 put calendar for $12

This trade is a bearish trade that allows you to be there for a selloff possible 1200 support. Ideally for this trade the stock would be as close to 1200 as possible.

A Word About Calendars Into Events: On the calendars we chose strikes that line up with the implied move of about 7% which should be a decent guide as it relates to the magnitude of the move.  In trades like this to make money it is imperative to get the direction right or you will be left with a way out of the money options that will see fairly dramatic decay due to the vol crush post the event.  So again, earnings trades are tough, which is why we are not playing, you need to get direction, magnitude of the move and timing right into an unknown event.