Priceline (PCLN) has had a great run since October 4, 2011 when it reached a low of $411.26. In just a little over a month, the stock rallied to $513.37, a 24.8% gain with a P/E over 36. I think Priceline's earnings will disappoint, resulting in a sharp pullback (click to enlarge image):
So how do you play this if this scenario were to pan out? Let's run through the game plan.
- I want to limit my risk if PCLN were to pop instead of drop;
- I want to reduce my cash outlay,
I would buy the Nov 475 put for $14.70 and sell the Nov 425 put against that for $4.50 for a net debit of $10.20. So the maximum that I will lose on the trade is $10.20 if the stock were to pop instead of drop. Note that the November options expire on the 19th so these are short term plays to profit for an event, in this case the earnings announcement.
The stock would need to drop to about $464.80 by November expiration for me to break even.
If the stock were to drop in a big way but above $425, I would sell my Nov 475 put for a hefty profit and leave the Nov 425 naked and let it ride until the end or close to the end. If the stock were to drop below $425 after I sell my Nov 475 put, I would be ok with owning PCLN at $425 and reevaluate after that.
If the stock were to drop below $425 by November expiration, my maximum gain would be $39.80, a more than 390% return.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in PCLN over the next 72 hours.