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Priceline Trade – Bear Call Spread

Markets are marching upwards in the hope of a fiscal cliff resolution. Priceline (PCLN) has moved up nicely from a level of 550 to 673 in the past month. That’s a 25% move. The stock is currently above the upper Bollinger band of 2 Standard deviations, and has resistance points till 695, so I’m expecting a pullback (see Figure below). Here is a Priceline trade (Bear Call) that I’m putting on right now.

 

The trade - 

 

- PCLN Bear Call Spread in January 2013 series

- Trade Rationale: PCLN crossed upper Bollinger band (2 Standard Devs)

- Short at 725 (Delta 0.23), and Long at 740 

- Spread 15 wide, 10 contracts

- Credit $2.7/share , Total $2700

- Days to expiry = 46

- Margin required = $12,200

- Return possible = 2700/12200 = 22%, annualized return = 175% approximately

- Adjustment point is if PCLN hits 700

 

Status: Executed for a credit of $2.7/share (see figure below)

 

21 Comments

  • Sorry for got to add – $PCLN profit target of $1500 to $1800 in 30 days. Do not plan to hold until expiry unless trade is in very safe zone.

  • I don’t know about this trade man. priceline is looking very bullish i follow the company fundamentals. their business is doing very well with key acquisitions and asia business

    • Agreed Tom. This is actually a “reversion to the mean” trade. The fact that it went up 25% in a month is the premise of the trade. For it to break my Short call at 725, it would have to go another 10%. Possible but not very probable.

  • Santa claus rally may be here lets see

    • Normally yes. But DC does not want to deal yet. So I sense some uncertainty in December this year

  • how long are you willing to wait before you take it off

    • If there is a deal in DC it’d be time to take it off Mike. All boats will rise with a rising tide. But i don’t see that yet – so for now its a time decay play until the end of the month. And perhaps some Delta gains if the stock goes down which it is right now

  • nice trade with thought out analysis.

  • Nice trade, lets see how it goes. WIll you post updates

    • Carol, the trade stands as i put it. No changes. I’m up about $600 in 4 days. Not bad. But i’ll hold on, and yes i will post any updates or adjustments. You can get my “blog feed” if you’ve not already done that. That way any updates will automatically come to your feed reader

  • Hari how would you adjust this trade – I’m following this on a paper trade

    • John I’d adjust it only if PCLN starts to move up. If you look at the post, I’ve mentioned an adjustment point of 700. I put the trade on when PCLN was 670, today its trading below 660. So the point is – the Bollinger band breach has worked nicely. It came into the bands again. This was really the basis for the trade

  • I agree with your analysis. I trade Priceline often and i’ve been shocked by how much it has gone up. This analysis puts that into perspective. But I’m not sure if the bear call is ideal because it may go up some more. The guys in DC will come to some agreement so in general the markets will grind higher and so will Priceline.

    • I agree that a deal in DC will change this trade’s rationale and I will take it off at that time. But I don’t think the deal will happen too quickly. I don’t think this would signal that either party negotiated hard. So if it comes i expect it towards the end of the month. By which time, the trade would have made its achieved profits from time decay

  • You put the trade based on Bollinger bands which may or may not be a great tool. I think ATR is a better indicator for volatility

    • Meroy i love the ATR (average true range indicator for the benefit of others). ATR gives you the current state of volatility of a stock and we can use it to get a feel for how much a stock is currently moving from high to low. or is expected to move at this time. But ATR does not give you a statistical perspective which Bollinger bands do. If you put the bands at + or – 2%, stattistically this represents 95% of the stock range. Now this does not mean that it WILL come back, but is more than likely to do so. I think we should use the ATR and Bollinger bands to glean different pieces of information or insights. How do you use it ? Let me know.

  • What adjustments would you make to the bear call

    • Eileen, I’d adjust it if PCLN went up to 700. And I’d buy In the money Long Calls in the Feb series to reduce time decay. I would buy just enough to neutralize my delta or make it slightly delta positive

  • Delta of the short option is .23 or the whole spread ? If its the short option this may be a bit risky right ? Priceline makes big moves

    • Cash, indeed the 0.23 Delta was of the short option. This same option delta is now less than 0.2 – I’ll be adjusting it if PCLN reaches 700 so the risk is not very high.