Priceline: Opaque Earnings To Go With Opaque Service?

| About: The Priceline (PCLN) (PCLN) now offers semi-opaque hotel reservations similar to competitor Expedia (EXPE) and Expedia's operating company Hotwire. For semi-opaque hotel reservations, customers are given pricing, general location and amenity information, but not the name of the hotel. has branded its semi-opaque hotel reservation offering as Express Deals. Will be interesting to see if the company's new semi-opaque offering contributes to the bottom line.

In the's Q1 2012 earnings call held on May 9, 2012, the company indicated it has begun adding bed and breakfast establishments as well as vacation apartments in the U.K. The company indicated it did not expect a spike in earnings as a result of the Olympics being held in the U.K., as the Olympics are for a short period of time and located in one city. With the global scale of Priceline's business, the increased activity due to the Olympics will only be a small blip on the radar.

The company reported gross bookings of $6.7 billion, representing growth of 44% year-over-year. The strong growth was attributed to Average Daily Rates (ADR) and continued growth in Asia Pacific and the Americas. Even with the spectacular growth experienced, the company noted the growth rate was negatively impacted by slowing growth in Southern European markets. Yet, the company was able to overcome the slowed growth in Europe with increased hotel supply and strong results from its rental car business The company noted its hotel reservation offering now has over 210,000 hotels, which represents an increase of 55% over the prior year.

Priceline's stock price has been rewarded by the company's high growth rate as shown below:

The stock price peaked around $775 in April, followed by a retreat and currently appears to be forming a base in the $650 range.

With Priceline's upcoming earnings release scheduled for August 7, 2012 and with the slowing observed in the European market, an investor might consider entering a protective position for Priceline, just in case the company reports bad news. Priceline is very exposed to Europe, so it would not be a surprise to see the company report some negativity with regard to its performance.

For protection, an investor might consider a protective covered call or collar strategy, as the strategy provides for positioning for a potential return, even if the price of the stock is stagnant, and provides for protection in case the stock's price drops significantly. A protected covered call may be entered by selling a call option against the stock and using some of the proceeds to purchase a put option for protection or "insurance".

Using PowerOptions tools a variety of protected covered call positions for Priceline for August option expiration are available as shown below:

(Click to enlarge)

The position with the highest potential return has a potential return of 3.3% (52% annualized) with a maximum potential loss of 7.1%, so even if the stock price drops to zero, the maximum loss which can be experienced is 7.1%. The specific call option to sell is the 2012 Aug 625 at $27.50 and the put option to purchase is the 2012 Aug 560 at $7.50.


  • PCLN stock (existing or purchased)
  • Sell 2012 Aug 625 Call at $27.50
  • Buy 2012 Aug 560 Put at $7.50

A profit/loss graph for one contract of the protected covered call is shown below:

For a stock price below the $560 strike price of the put option, the value of the protected covered call remains unchanged. If the price of the stock increases to around $680, the position can most likely be rolled in order to realize additional potential return.

Looking forward to your comments!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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