Selling Calls on This Travel Company Looks Juicy

12/15/2010 12:01 am EST

Focus: OPTIONS

Elizabeth Harrow

Financial Analyst, Schaeffer's Investment Research, Inc.

In a note to clients yesterday morning, UBS indicated that now is an opportune time to write calls on Priceline.com Incorporated (PCLN). Citing "no catalysts that could potentially move [the] shares higher" until PCLN's February earnings report, the firm recommended that clients consider selling covered calls on the stock to generate profits.


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Specifically, UBS thinks that PCLN's January options series offers some interesting premium-selling opportunities. With the stock trading near $413 at the time of this writing, PCLN's January 2011 420 call is pricing in implied volatility of 33%, while the January 430 call carries implied volatility of 32%. By contrast, the stock's one-month historical volatility stands at just 26.4%, confirming that these options are expensively priced at the moment.

Plus, the $430 level has kept a lid on PCLN's rally attempts since early November. If this region continues to act as a technical ceiling, it would be very good news for a January 430 short call position.

The Risk: PCLN's healthy supply of short interest is one point of concern for potential call writers. A healthy 7.1% of the stock's float is sold short, following a 12.2% increase during the past month. In the event of any good news for the stock—such as a potential analyst upgrade or price-target boost—a rush to cover by the shorts could send PCLN suddenly higher.

By Elizabeth Harrow, contributor, Schaeffer’s Trading Floor Blog

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