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Options Update: Priceline.com Draws Heavy Put Volume Ahead of Earnings

Online travel firm attracts a short vertical put spread heading into its quarterly earnings report

by Joseph Hargett (jhargett@sir-inc.com) 11/4/2009 3:00 PM

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The options pits are buzzing with activity ahead of priceline.com Inc.'s (PCLN: sentiment, chart, options) quarterly earnings report, which is scheduled to hit the Street on Nov. 9. The online travel firm is expected to bank a profit of $2.90 per share, up $2.39 per share from the same quarter last year, though call traders may have set their sights higher. Specifically, PCLN's Schaeffer's put/call open interest ratio (SOIR), which compares put and call open interest for options set to expire within the next three months, arrives at 0.75 -- meaning that calls have been slightly more popular recently. However, this ratio ranks below 72% of all those taken during the past year, indicating a heavy degree of optimism from the options crowd.

Furthermore, data from the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE) point toward heavy call buying ahead of the event. For instance, PCLN's 10-day call/put volume ratio of 3.36 reveals that calls bought to open have more than tripled puts purchased during the prior two weeks. What's more, this reading ranks just four percentage points shy of an annual peak, meaning that options traders have rarely snatched up calls at a faster pace in the previous 52 weeks. As such, this increasing preference for calls indicates that options traders might have higher expectations for the company's earnings report.

That said, puts are the investment vehicle of choice in today's trading. Nearly 7,000 of these bearishly oriented contracts have changed hands so far, more than sextupling PCLN's daily average. The most active put is the November 140 strike, with more than 4,000 contracts crossing the tape.

Digging into today's options activity, I uncovered what appears to be a short vertical put spread. These strategies, also known as credit spreads, require the underlying stock to remain above a certain level through expiration. The trade was centered on PCLN's November 140 and 135 puts, with 116 contracts trading at the ask price of $1.52 on the November 135 put on the Chicago Board Options Exchange (CBOE) around 9:41 a.m. Eastern time. As for the November 140 put, 116 contracts changed hands at the same time on the same exchange for the bid price of $2.12. Both blocks were marked "spread." If you are following PCLN today, you know the shares are trading near $165 per share, placing the 140 put deep out of the money.

PCLN November 140 and 135 put option volume details

The Anatomy of a Priceline.com Short Vertical Put Spread

Getting down to business, the trade breaks down like this: The trader pays $17,632 for 116 November 135 puts -- ($1.52 * 100) * 116 = $17,632. Meanwhile, the trader receives a credit of $24,592 for selling 116 November 140 puts -- ($2.12 * 100) * 116 = $24,592. At this point, the trader has pocketed a premium of $6,960 -- ($24,592 - $17,632) = $6,960. The breakdown for this short vertical put spread is listed below:

PCLN short vertical put spread breakdown

Breakeven for this trade is equal to the sold strike minus the premium received, or 139.40 --140 - ($2.12 - $1.52) = 139.40. The maximum gain is equal to the total premium received -- $6,960 -- while the maximum loss is limited to the difference between the 140 strike and the 135 strike, minus the net credit received, and is reached if PCLN trades at or below $135 per share on expiration. In this case, the maximum loss is $4.40, or $440 per contract -- (140 - 135) � 0.60 = $440. Below is a chart for a visual representation:

PCLN short vertical put spread profit/loss chart

Implied Volatility

After the short vertical put spread has been established, increasing implied volatility is pretty much neutral to the overall position, as it lifts the value of both the sold option and the purchased option. Currently, implieds for the November 140 put arrive at 75%, while the implied volatility for the November 135 put rests at 78%. PCLN's one-month historical volatility is currently perched at 32.85%, meaning the aforementioned options are considerably expensive at the moment.

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Options Update: Priceline.com Draws Heavy Put Volume Ahead of Earnings

Online travel firm attracts a short vertical put spread heading into its quarterly earnings report

by Joseph Hargett (jhargett@sir-inc.com) 11/4/2009 3:00 PM

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