For the past month along with the overall market, priceline.com PCLN has been in a downtrend that it can’t negotiate itself out of. Specifically, the stock has dropped from a recent high near 274 (reached on April 30) to its current last price near 185. That’s a 33% decline in four weeks. But the downtrend can’t go on forever (theoretically), and one analyst is trying to call the bottom.
Tuesday morning, priceline.com shares were upgraded to a “buy” at Keybanc from a “hold” rating, with a 12-month price target of $260. The accompanying statement noted that “investors have been afforded an opportunity to own a high quality, market share leading growth company … at an attractive valuation level.” While the stock initially moved slightly higher in early trading, fueled in part by this vote of confidence, the selling resumed late morning, sending PCLN into the red throughout Tuesday afternoon’s trading.
Even considering the stock’s recent decline, 100 shares of the stock will run nearly $19,000 (plus commissions) for those who believe in the Keybanc analyst’s thesis. Whether you are bullish or bearish on the stock, there may be option strategies that would be more affordable choices and could take advantage of leverage. Historical volatility on PCLN has recently surged to a new one-year high of 67%, inflating the price of PCLN options. For that reason, option traders may want to look into credit spreads, which involve premium selling (in lieu of premium buying).
Two hypothetical credit spreads on priceline – one bullish, one bearish – are outlined below. Remember these are merely examples, not recommendations. Consider your own risk/reward parameters and personal trading goals before executing any new trades.
*Prices given as of Tuesday’s close. PCLN closed at $185.01.
Bullish Option Strategy: Bull Put Spread
Investors in the moderately bullish camp could consider a bull put spread, specifically the January 150/145 spread. By shorting the 150 put and buying the further-from-the-money 145 put, the investor collects a net premium, or credit, of $1.60 per spread. He keeps this entire credit at expiration if PCLN is trading above $150, at which point both of these puts are out-of-the-money. Maximum loss is limited to the difference in strike prices minus this credit, or $3.40, for a return on risk of 47%.
The breakeven for this strategy is $148.40, so PCLN could fall nearly 20% between now and January and this spread would still be profitable. Of course, with this and other American-style options, the investor can close the trade at any time between execution and expiration.
Bearish Option Strategy: Bear Call Spread
Investors who expect further downside in PCLN shares could consider the bull put spread’s counterpart – the bear call spread. The October 190/195 call spread can currently be sold for $2.50 by selling the 190 strike and buying the 195 strike. If PCLN continues to trade south of $190 when these options expire, the investor keeps this credit as profit. The maximum risk is also $2.50, or the difference in strike prices minus the premium. The investor will suffer the maximum loss if he holds the spread all the way through expiration and PCLN is trading above $195.
Breakeven for this strategy is $192.50 at expiration – if PCLN is trading anywhere south of this level on October 15, the bear call spread will be profitable (excluding commissions).
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