Can Priceline’s (PCLN) rally continue?

Priceline.com (PCLN) Back in early June, we looked at a bullish (a January bull put spread) and bearish strategy (an October bear call spread) in priceline.com PCLN. These strategies came on the heels of an upgrade to “buy” from “hold” at Keybanc. The stock was trading at $185.01 then; now it’s at $220.67. So the hypothetical January 150/145 bull put spread would have a lot of breathing room and investors who sold the October 190/195 bear call spread might be heading for the exits.

Well, the stock is back in the spotlight once again as FBR Capital Markets initiated coverage on the shares with a “market perform” rating (essentially a hold) and a 12-month price target of $200 (representing about 9% of downside from current levels). FBR believes the online travel agent is well positioned to benefit from an upsurge in online travel bookings.

The firm also believes, however, that certain challenges such as increased competition and exposure to the European market could bring the stock back in line with its sector, which it has outperformed in the past few years. Although PCLN is almost 20% off its all-time high (reached in April), it has bounced back almost 30% from its early-July low.

For PCLN bulls, the price tag for 100 shares looks pretty steep at roughly $22,000. Those investors who do opt to buy the shares (or who have an existing holding) might want a way to hedge their investment. Below we have outlined the “married put” strategy. What’s a married put, you ask? You’re in luck, as Jared and my next Two Traders, One Strategy webinar will cover this topic in full detail. Register for free through our events page.

The examples below are hypothetical and should not be interpreted as buy/sell/hold recommendations. Always consider your risk/reward parameters before placing any new trades. Prices are given as of Thursday afternoon, when PCLN was trading at $221.03, up $5.68 (2.6%) on the day.

Moderately Bullish Option Strategy: Bull Call Spread

Those who expect PCLN to move slightly higher (or at least hold its ground) could consider an intermediate-term bull call spread. For a net debit of $27, investors could buy the October 180/220 spread (buying the 180 call and simultaneously selling the 220 call). The maximum loss is capped at this premium paid and only occurs if PCLN is trading below $180 when the options expire on October 15. Of course, traders could sell to close this spread at any time to take profits (or losses) off the table.

The maximum profit, which occurs if PCLN is still above the $220 mark at expiration, is $13, or the difference in strike prices minus the premium paid. Breakeven for this spread is $207, or more than 6% below current levels.

Option Strategy: Married Put (Bullish but with a hedge)

Investors concerned about the overall market or priceline’s short-term prospects (in the near term) could consider the married put strategy. For every 100 PCLN shares that are owned (or purchased), one August 195-strike put could be purchased. This strike is about 12 percent to the downside. In the example below, the trader bought the put for $5.75 and bought stock for $221.03 per share. At expiration, breakeven is $226.78, or the stock price plus the put premium. Above this level, gains are theoretically unlimited. Note that gains are reduced by the debit paid for the put contract(s).

The real advantage of the married put comes in if the shares decline. While an investor who bought PCLN shares at $221.03 could potentially lose his entire investment, the purchase of a married put limits losses to $31.78, which is the price of the put plus the downside from $221.03 to $195. If the married put buyer owned the stock at a lower (or higher) level, the maximum loss would differ in dollar terms. The married put can be considered a dynamic stop loss enabling the holder to sell stock at 195 any time until expiration regardless of any gaps lower.

Priceline (PCLN) married put