Upon reflection, I've decided to open the PCLN) position that I discussed over the weekend. Click here for my prior analysis.
After setting a new high, the price settled and is trading 0.9% below Friday's close. Volume is way, way down, as I would expect before an earnings release.
However, news reports say there has been significant call option trading, which suggests a volatile response to the announcement after today's market close.
A reader wrote to suggest a straddle as a good play for this stock, and I do agree. A straddle is an options structure composed of a long put and call with the same strike price and expiration.
It is a pure volatility play that will make money if the stock moves, but is agnostic as to the direction. It caps risk on the downside of each option but allows unlimited gain (although the put and the call will offset each other to a greater or lesser extent, depending upon how great the price move is).
I have chosen for my account to open a bull put spread, which caps both risk on the downside and gain to the upside, and structured with a bias to the upside, which is where I think earnings surprise is most likely to occur.
My structure is to go short the December $370 put and long the December $360 put, for a credit.
Today's price decline has increased my max profit to $380 and decreased max loss to $620, so it is a slightly more attractive trade.
See my writeup of Sunday for the details.