The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
NEW YORK (
) - Although regular readers of my column expect me to cover how current vice president/then Senator Biden threatened to impeach President Bush if he took action in Iraq without congressional approval, I must resist the temptation to point out the obvious double standard and get back to trading the volatile market.
So let's get back to our discussion on combat options trading.
Strategic mindset: Bearish with limited risk, low cost, upside room
Trading at $452
Fuel prices are high and airlines have to squeeze every last penny from customers (and employees by the way) that are being squeezed elsewhere through rising food and gas prices, etc.
International travel to Japan has also been impacted. Because of this, we don't see PCLN having a great quarter. We are even more focused on the sideways movement over the past week. These trends don't usually last long, especially in PCLN.
A weak consumer is spending less on travel, which should impact PCLN.
Of course, anything could happen, so we are taking a bearish stance, but also having protection if PCLN rallies. "Make sure you hedge" means make sure you hedge, especially in these volatile markets.
PLCN reports earnings May 9, 2011
Tactic: Double Bear Vertical Spread in May
The tactic that we're using for this trade is a Double Vertical Spread, where we will buy an out of the money (OTM) bear put spread and sell an OTM bear call spread for a net credit. Since we're cheap, the bear call spread finances the cost of the bear put spread. It will become profitable quicker than just a bear put or bear call spread separately. It's a trade on full afterburner. This trade is being done for a credit, which means that if the stock stalls and stays between our spreads we will retain that credit that we take in.
- Sell to open 10 May 400 puts
- Buy to open 10 May 405 puts
- Sell to open 10 May 505 calls
- Buy to open 10 May 515 calls
- As a spread
- For a net credit of $.95 or more
- Max risk per spread = $9.05 per spread ($905 per x 10= $9,050)
- Max profit = $5.95 per share, $595 per spread
- BE = $504.05 upside, no downside break even, although if PCLN goes to 0 I would be more concerned that the world ended.
This is a combination of 2 vertical spreads done together and we will be selling 10 of the May 505/515 call spreads and buying 10 of the May 405/400 put spreads for a net credit of $.95. We will do the entire trade at once in our model portfolios.
The credit will be retained if the stock remains between $405 and 505 on May expiration and we will make money dollar for dollar up to $5.00 below 405
If the stock begins to drop, we could realize a profit rather quickly. Stocks tend to move down faster than they move up, especially in a volatile market.
Eject Criteria: No more than a $4.00 total loss, which would mean we would have to close the spread at a debit of $4.95.
Our model portfolio objective is roughly 40% of potential additional profit, so if the spread gets to the point where we can close it for $2.00 additional credit
Firing line: The devastation in Japan, ongoing Middle East troubles, debt woes both foreign and aboard, unemployment, housing, and QE II ending in a couple months does not paint a rosy picture. The market has seen a couple relief rallies of late, but we're not buying it.
Close trade if commit criteria changes.
- Buy to close 10 May 400 puts
- Sell to close 10 May 405 puts
- Buy to close 10 May 505 calls
- Sell to close 10 May 515 calls
- As a spread
- For a net credit of $2.00 or more