Priceline dropped $117 on earnings August 8. Since then, it has been behaving and more range bound between 560 and 600. I am looking at a weekly strategy with a great risk reward to play this more range bound market in PCLN. Here is a trade idea one of my students, Fletcher, has been doing successfully the last 3-4 weeks. Remember that past performance is not an indication of future performance.
Trade: Butterfly Strategy PCLN $592
Marty Kearney at The Options Institute and I had a discussion whether this was a butterfly, an Iron Condor or a Split-Strike Butterfly. Look at the strikes I chose and decide:
Buy 1 PCLN weekly August 605 call
sell 1 PCLN weekly August 595 call
buy 1 PCLN weekly August 580 put
sell 1 PCLN weekly August 590 put
Total Credit $7.50 (using weekly option that came out today and expire next week, Friday Aug 31). Commissions are not included and we have a few different strike prices we’re working with.
Why I like this strategy? Great risk reward: I can make maximum $750 with total risk of $250. It’s also going into a holiday weekend (Labor Day is Monday after Aug 31 expiration), so maybe stock movement slows down next week.
What’s my Plan? Would look to take this trade off for a profit of 20-25% probably Monday.
What price level Monday will PCLN need to be around to get your profit? 582-600
At what price level Monday should I get concerned with this spread? Under $580 or over $605 would start to get me concerned enough to either adjust or exit this trade.
What if I faint during the time I have this spread position on, and Priceline goes to zero? Remember, this is a great risk/reward trade and my maximum loss is $250.
What are my breakevens if I hold the entire position until Friday, 8/31?
$582.50 (590 put less $7.50) and $602.50 (short 595 call plus $7.50), excluding commissions.
What do I like best about trading Weekly’s? First, stay small. I have a very short term outlook, and with Weekly’s I can take advantage of accelerated time decay.
Have a great day!