Is this a good time to purchase options on Google? With earning coming out this week, it just may be. Here are a few different strategies to consider.
This is earnings week for Google (GOOG). The concern most investors are going to be having this earnings season will not be if the companies will surpass earnings. With many Wall Street gurus downgrading the expectations of many companies, there will be more concern whether companies meet the earnings. After the downgrade, meeting expectations will be good news.
Since mid August, Google has been on a slight bearish journey, going from a high of 627.50 down to 515.12 as of Friday evening. At the same time, we are seeing more volume and money going into GOOG. If this continues, free market common sense would say we are going to see Google move up. Lately, GOOG has followed the movement of the DJI.
If this continues, we need to keep in mind the statistical probability of what expectations are for the 4th Quarter. We do know that when the market has lost more than 10% in the 3rd Quarter, the 4th has been profitable. Since the S&P 500 lost 12.2%, we are in good shape if we are following along statistically.
Even though GOOG and Samsung Electronics (005930.SE, SSNHY) have delayed their public announcement of their new mobile phone product because of the passing away of Mr. Jobs, this should have no affect upon the stock like earnings this week. What we need to watch is some of the major players this week as we get started. Alcoa (AA) on Tuesday; JP Morgan (JPM) on Thursday at 7:00am. Results from the trio should offer investors a sense of whether companies have been able to override the economic and political challenges of the past three months. If this is the case, we may see a nice ride into bull country for an extended period of time!
If you own Google stock…
If you own Google stock and we are positioning ourselves for earnings, a version of an options strategy known as a “Strangle” might be in order. With the high volatility, this is a good protection strategy if you own the stock. With this particular options strategy we are buying call and put options (OTM) — Out of the money, with the same expiration. In this highly volatile trading time, it is not uncommon for GOOG to move 40 to 60 points in a trading week. Since GOOG is trading around 515, we are looking at a possible move up or down if earnings influence a quick move. In this strategy, if we buy a 555 call for $13.40 (per 100 shares) if the stock moves and we are called out, we have made $4000 on our shares while spending $1340.
If this stock falls, we make a different play, buying closer to the money. If we buy a 475 put for $14.90, we are protecting ourselves on the down side. A complete drop below this level and we can put the stock to the buyer with minimal loss. As the stock drops, we can turn around and sell our put as it increases in value to cover downside loss. This is a little farther out than most average strangle plays.
Straight Option Plays
Since GOOG has a slight bearish slant, we’re going to create a strangle but lean it toward the bearish side. We are looking at making money on a larger move from GOOG if we are going to make money at all. If we buy a call and put about 20 points out on either side, we are going to make money as long as GOOG moves more than 40 points one way that week.
If we are more focused on a play one way, a simple debit spread would offer the least risk but greatest reward if the stock moves in your favor. As an example, if you are bullish, buying a 535 and selling a 540 for a debit of 2.50. If it rises to or past the 540 level you have a nice profit.
Go to Seeking Alpha for the entire original post
Leave a Reply