Update – Priceline (PCLN) Travel Violation

by CC October 10, 2017 1:48 pm • Morning Word

Sometimes you’re so wrong so quickly on a trade idea you can be paralyzed. That helpless feeling isn;t great for decision making. We often refer to that on the site as “not wanting a trade to become a lotto ticket”. That’s the case after we took a look at PCLN a little less than 2 weeks ago. Here was the trade idea, from Sept 28th:

The stock is probably a hard press on the short side, but when you consider how poorly the stock acts, another miss and guide down when the company reports in early November and I suspect you have the stock back near 1700.

So What’s the Trade?

Trying to limit overall cost in a stock like this is important. Therefore a put fly targeting 1700 makes sense over a put spread:

Bearish

PCLN (1811) Buy the Nov 1800/1700/1600 put fly for 20

  • Buy 1 Nov 1800 put for 62
  • Sell 2 Nov 1700 puts at 26 (52 total)
  • Buy 1 Nov 1600 for 10

As we said we knew any bearish position following weakness was pressing it a bit and we tried to limit the risk because of that. But with the stock bouncing hard from those levels this trade is no longer lined up correctly, with its breakeven below where likely support would come on the next down move. With the stock now 1922 this fly is worth about 8.50, so a little less than half at the entry.

So What to Do?

There a few options here. One is to leave it as a lotto ticket into earnings, but the issue is the breakeven in 1780, substantially lower and beneath support:

So the best bets here are to simply close the trade at a loss and look elsewhere or manage the trade a bit with a roll. As far as roll go there are a couple of options. I think whatever the thought process is here 1800 seems like the area to target for a pullback. The Nov 1875/1800/1725 put fly is currently about 10.00 and change, meaning the roll only costs a few dollars (trying not to throw good money after bad) but sets up for a more realistic move targeting 1800.

Of course that can only be worth 75 but its profitable range of 1865 down to 1735 is a pretty wide and realistic one where the losses could maybe be rescued and it could even be profitable. It also give the position a chance to make some money back if the stock pulled back even before the event itself, with the option of getting out before the event itself. By reducing the width we’re able to do the roll without a ton more money spent and add optionality to the position rather than letting it rot as a lotto ticket.