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What You Can Learn from Priceline's After-Hours Action


If you go to a strategy of selling options ahead of earnings, you need a plan.

Some more thoughts on (PCLN) after the news. If you own stock like Dollar Bill Shatner, go re-order your marble back scratchers.

For anyone else?

Well, after hours on Monday, the stock traded within the 10% range anticipated via the options board. And even on the open, Priceline was up about 10-11%. Volatility went down to the low 40s -- about what the options board suggested -- so not a disaster.

And then it became Amazon (AMZN) of two weeks ago: Stock broke the early range, and options crept up to a high 40s volatility. If you were short premium ahead of the number and took no action when you were down small, you were now down large. Hindsight is 20/20, but it's as good a rule as any to just stop out when a stock breaks the early range (first 15 minutes or so).

Basically, if you go to a strategy of just selling options ahead of earnings, you need a plan. You can do a lot of names and know you'll take an occasional hit along the way. You can stop yourself out and even take a loss on the stock trade if it proves erroneous (remember you'd be winning again on the options part of the trade). You can buy "wings," i.e. further ATM calls and puts that define the risk.

What you can't do is just watch them and cross your fingers. They don't tend to break one way and then reverse. In fact, if you have no position, you want to play the momentum. I used to try a "broken stock" play on down gappers. I'd try to short some calls early on with the thinking that the volatility would open too high AND the stock would be unlikely to fill the gap so fast. But since no stock ever declines any more, what about the reverse? Say we sell puts into mini-weakness on an up gapper? Or put spreads?

Well, nothing works all the time. But if you use some discipline (say, bail from the trade if it breaks below the early range) then I like the idea. Of course it's not that simple: I tried to leg put spread sales in Priceline and got some off here and there, but the idea behind a breakout is it's tough to get fully onboard before it happens. That's why it breaks out.

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