Priceline On Tap

• Posted by Adam Warner
• on November 8th, 2009

Set your phasers on stun, Priceline (PCLN) reports Monday night.

Will the Federation win, or will that Evil Kirk from the parallel universe prevail yet again? Does that statement even have any meaning? Dammit Jim, I’m an options trader not the keeper of the Goldman HFT Machine.

OK enough, I wasn’t actually a trekkie. Go to a bunch of shows and greet everyone with  “live long and prosper” and name your kids Scottie and Uhura and you start to get mislabeled.

But anyway, about those PCLN earnings, check out those volatility graphs down below. Where does it look like implied volatility will go after the number? Realized volatility looks like it averages about 30, so give it a little premium and maybe IV goes to 40. Outer month options reflect “mean” assumptions and don’t tend to decline much after a report, and they’re more like 47, so perhaps 40 is a little low. In either case though, it’s a long way down as Nov. options closed at a 70 volatility and will still have almost 2 full weeks of trading in them (in other words, they’re not opening at parity).

Throw it all in the Gasparinotron 3.0 Earnings Prediction Simulator and it looks like the options expect PCLN to move about 10% after the number, something PCLN does tend to do.

Just remember all the disclaimers on this. It makes no prediction of direction. My personal prediction is that if the general trend of the stock and the short term trend of the market is up, then it probably goes higher. If the magnitude of the move is nowhere near 10%, it doesn’t mean options are wrong. If an NFL point spread is 3 pts. and the game ends in a blowout, doesn’t mean the point spread was wrong either. If PCLN could report 1000 times, the expected gain of net buying or selling options would likely approach zero, but in one snapshot, anything can happen. Net selling options ahead of earnings will win more often than it loses, but some losses will dwarf the average gains (cough…Amazon….cough).

 

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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