Options Investing: Free Option Trade (PCLN)

Options investing: Here’s another free option trade on PCLN (The Priceline Group)

I’ve been working on a new trading system for option credit spreads. This pick came from that system. So far the system has been hitting 90% winners.

PCLN: Sell Apr 210/200 Put spread for .82 credit.

Max Profit $164

Max Loss $1836

Potential ROI: 8.9%

You should take the option spread off when it gets to .10, or if you are down 10%.

This is just an example, trade at your own risk.

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  1. Chuck on March 9, 2010 at 4:11 pm

    How do you figure 10%, i.e. 10% of what?

    • Genius on March 9, 2010 at 4:36 pm

      10% of the margin.
      Sorry. I meant that if you are down 10% in the trade. So if the Margin is $1,000 you would be out if you were down $100.

  2. dixjazzy on March 9, 2010 at 4:35 pm

    I would be reluctant to take this trade because I think in the near future the market is headed for a big downturn and the 2010 strike price could easily be reached.

    • Genius on March 9, 2010 at 4:38 pm

      But do you have anything to back that up?
      There are always people saying we are going up and others saying we are going down. I agree that this stock has had a monster move recently, but as long as the market does not drop this trade should do fine since I am far enough away from the money. But what makes you think the market is going to drop? Do you have an indicator or is it just a feeling because of the recent moves and low volume?

  3. Peter Baum on March 9, 2010 at 4:37 pm

    I have traded PCLN before – it is a very volatile stock and accordingly offers generous premiums. I do use technical analysis and the stock is still in an uptrend.
    It looks like that trend could continue for
    another few weeks. However, like many other
    stocks it approaching overbought status and is due for a pullback – it is just hard to say when that will start. I’m a firm believer in stochastics, especially those on
    the weekly charts. When they give you a sell
    signal (or a buy signal for that matter) they
    are almost always correct. As long as there are no sell signals, this trade is likely
    to be successful.

  4. Don on March 9, 2010 at 4:38 pm

    Looks interesting to me. I like the directional play in what appears to be a solid strong uptrend. Nice to have some diversity to the straight credit spreads in a strong market. Risk/reward seems a little low at 8.9% but I like the strike selections as basis the stock chart there seems to be solid 220 to 230 support.

  5. C. Millard on March 9, 2010 at 4:41 pm

    The trade looks good. I personally wouldn’t do this trade just becuase I have been burned with priceline in past.

    Looking at a six month chart the stock has more then doubled. In my opinion the stock is due for a pullback. Will it pullback to 210, I don’t know, but it is a risk I am not willing to take.

  6. SYED on March 9, 2010 at 4:56 pm

    why don’t we find safer like AIZ(trading below book value) or XLF or IWN or even IYR. Even these are assigned you have good long term investment. Others could be canadian MFC or SLF trading below book value.
    I think your trade is okey but I try to be safer.

    • Genius on March 9, 2010 at 6:05 pm

      The safe stocks you mention are great for other strategies like butterflies and calendars. But the implied volatility in them is not enough to provide the same returns in a credit spread.

  7. SYED on March 9, 2010 at 5:02 pm

    looks like no body likes my idea about little safe stocks

  8. Bill on March 9, 2010 at 5:08 pm

    Allen, here are my words: PCLN just moved from 200 to 238 in the last 30 days – almost 20%. That seems like a big % movement in 30 days. PCLN is at 238 now.
    Your 210/200 pick will win completely providing that PCLN does not move down 28 points – which is 11.7% (238-210=28, 28/238): Are you thinking PCLN will continue to climb, be flat , or not drop 11.7% in the next 5 weeks? If so, then this is a good trade. Is this your thinking? and what your research showed? If you think it will also not move up more than 12%, then you could also do a credit spread 12% on the call side (270/280) and pick up another 50 cents for the same money. Bill.

    • Genius on March 9, 2010 at 6:03 pm

      I would not add the call spread because this thing is too volatile, especially lately. I do not have an opinion. What I see is a stock in an uptrend in a market that is in an uptrend. So doing put spreads on this would make sense, until the market changes and you lose big if the stock drops. That is the danger with credit spreads.

      My guess would be the stock will slow its ascent and hover here.

  9. John on March 9, 2010 at 5:32 pm

    I actually like this trade. For a couple of different reasons:

    1. Looks like PCLN is trying to raise $500 million, and that things are going smoothly in that direction. Also, they announced this morning a second partnership — which may not seem like a big deal but generally the creation of partnerships help buoy stock price.

    2. The chief economist of Goldman Sachs today said that the S&P is currently undervalued by 100-150 points.

    3. The XPs are placed well below the “post earnings” call support level.

    So I like this one…. I’ll put it on tomorrow. My problems is getting filled!!! If anyone knows a secret on how to get good fills please pass it along….!!! Thanks.

    • Genius on March 9, 2010 at 6:01 pm

      Remember, I am not suggesting this trade, just posting it as something we can look at. Seems like most people don’t like this trade, but you mention some good fundamental points. I noticed this stock because of a technical signal.

  10. john on March 9, 2010 at 5:35 pm

    Options House gives this a 44% probability of success.

    I’ve been doing a fair number of spreads, but find that I like doing them short term or near expiration.

    I don’t think that fits your mode of operation.

    I followed MEE up 3 times this month in $3 increments

    • Genius on March 9, 2010 at 5:59 pm

      For a credit spread like this, the fewer days to expiration the better. But even out 38 days I am still having trouble finding trades giving 10% potential roi being out at least 1 standard deviation from the money. The volatility is just too low right now.

  11. Jeff L on March 9, 2010 at 5:39 pm

    Honestly my thought is 8.9% is not high enough to make it worth the risk. I’d be more inclined to make things more worth my while and go with the 220/210 spread for 19.5%. Plus, it looks like we’ve got some really good support right there around 220 if things started going against us.

  12. Kevin on March 9, 2010 at 5:57 pm

    Probabilities look OK on TOS- currently shows a 14.06% probability of expiring higher than the breakeven. Delta of the 210 is a little higher at .14 than I prefer (moved up today). I would rather put this position on an index- I feel there is less risk on news. But lately I am second guessing myself. How are you picking your credit spread vehicles?

  13. BAM on March 9, 2010 at 6:13 pm

    I’ll take 90% all month long. I’d like to see more of these. Although 8.9% for tying up your money for 38 days might be a little low, maybe some other stocks would show a beter return.

  14. Thor Zollinger on March 9, 2010 at 6:36 pm

    The stock is currently near the top of the trading band and likely to either scrape along the top of the band for a while, or it could drop to the bottom of the band in short order taking out your spread. I would wait until the stock moves to the bottom of the band, then sell a put spread and ride it up going with the overall trend. I’ve found trading against the trend is difficult unless the trend slope is less than 0.6 Standard Deviations per month.

    A put spread is the correct move, since the trend is upwards. The probability distribution curve is easier to bracket behind the trend, especially if you wait until the stock is in the bottom of the band, since the maximum counter-trend excursion is limited to the width of the trading band (about -0.8 std dev’s). A call spread wouldn’t generally work, since the distribution curve extends too far out ahead of the stock to bracket effectively, peaking at +1.1 std dev’s and extending out as far as +4 std dev’s.

  15. claude 1255 on March 9, 2010 at 9:48 pm

    All the indices dji, spx, and nasdaq are very near their yearly resistance . I’ d wait a few days , Either they’ll break through or hit it and turn around and go down.
    I’ d wait for a pull back below their 7 ma line at least before placing this trade.

    Also the profit to loss ratio is very high.
    Profit $164.00 max loss $1836.00. not exactly
    very advantageous, I think. I don’t like the odds.

  16. Maxima on March 10, 2010 at 1:21 am

    At a glance the trade appears a good one. But it’s too soon to make this trade. The stock has tested the 238 level the second time but it couldn’t spear through it. If it’s out of steam, it’ll go down to 220.59 which is still higher than 210. However, R/R ratio is over 11/1, kinda risky giving the capability of the stock’s swing in the past. Fundamentally, the stock is average to its industry. If it spears through 220.59 the next level would be 206.45 on the down side. 206.45 is lower than your recommended sell put of 210, at this level this trade would have lost big time. Next earning is in May so we are ok here. Over all I wouldn’t make this trade. Too risky for me. Thanks for sharing!

  17. R on March 10, 2010 at 8:18 am

    I like this type of trade, however I believe the timing is off for an entry. The uptrend no doubt is in place but this is a volatile stock and its current bullish run appears to be reaching maturity / exhaustion.

    I would feel more comfortable entering at a break out or cross over from a retracement at which point I might move up in Delta’s for higher premium and obviously higher risk.

    Keep the ideas flowing !

  18. John on March 10, 2010 at 10:39 am

    Just one more comment to add to the fundamentals as to why this might be a good trade to look at…..

    This morning, Citigroup believes the market is undervaluing aspects of Priceline.com and reiterates a Buy rating on the stock with a $275 price target.

  19. Sonny Garcia on March 11, 2010 at 1:25 am

    If this trade has the 90% chance you say, then 9 trades would yield 9 x $164 = $1496 and the one loser would be $1836. Does not look good to me!

    • Genius on March 11, 2010 at 11:12 am

      I never said this trade has a 90% chance. i dont think I even looked at the probability on this one. The system I have been testing is getting 9 ouf ot 10 trades correct.

  20. Thor Zollinger on March 11, 2010 at 11:30 am

    A 90% success rate is pretty darn good. Most systems are down in the 55 to 60% range and make up the difference with tight money management.

  21. syed on March 11, 2010 at 2:42 pm

    Can anybody look at these trades I am thinking to do. What you think:

    xlf PUT sep.2010 $18
    xlf PUT Apr.2010 $16
    iyr PUT jan.2011 $50
    iwn put jan.2010 $70
    slf put jan.2010 $36 (canadian)
    mfc put apr.2010 $22

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