Update: Google (GOOG): A Long Premium Short Dated Trade Into Earnings-Closing Out

by Dan October 13, 2011 1:30 pm • Commentary

Update Oct 13th 2011 at 1:20pm:  Since posting on this trade Monday morning, GOOG has rallied 4% and it is up almost 8% on the week so far.   The trade detailed below cost about 12.00 and can now be sold for about 17.00. I want to pull the plug on this one as I feel that GOOG’s 15% rally in the last 10 days is getting a little extended and frankly I have no edge whether or not the company will beat expectations……

While I love to take punts into events, I am not in the business of doing this without strong conviction, which, to be honest I do not have at the moment in this name.   Holding call spread into tonight’s earnings announcement would be just that, a low conviction punt where I am now risking 17 to make 33 if the stock is up 8.5% on next weeks expiration.  When I posted on the trade I liked the risk reward of paying 12.00 to make 38 and was frankly making more of a market call this week than a specific call on GOOG.  I want to take the 40% profit and move on.

 

Original Post Oct 10th 2011: A Short Premium Long Dated Trade from the Options Action Crew, And A Long Premium Short Dated One From Me

Friday on Options Action my friend’s and CNBC cohorts, Mike Khouw and Carter Worth recommended a bullish strategy in GOOG prior to Wednesday’s earnings announcement.

Mike Suggested making a low risk relatively high probability trade by selling a Put Spread in Jan…….I like both of their analysis from a fundamental and technical perspective, but the trade structure is not exactly my cup of tea.  Mike is not playing earnings, more playing what he thinks the trend will be and thinks this is a high probability defined risk way to play…..and I agree with all that…..But I am a trader and like to get in front of events with potential payouts that are worth the premium at risk.

I would prefer to commit a certain amount of premium to a bullish bet in this name in front of earnings….Here’s the Trade:

MY VIEW AND LONG PREMIUM BULLISH TRADE INTO EARNINGS:

-Company reports their Q3 earnings Oct13 after the close.  The options market is currently implying about a 5.5% move vs the 4 qtr average move of about 8.5%.

-stock is one of the worst performing large cap tech stocks down about 10% ytd vs the Nasdaq which is down about 4% ytd.

Last qtr when the company reported their Q2 sentiment was very low on the name and beat and positive commentary was met with a massive rally of about 13%.

-The stock has rallied about 10% in the last week in line with the move in the broad market, but remains down about 15% from the July highs.

-If the company is able to beat again, offer positive commentary (they do not offer official guidance) and any incrementally positive data on GOOG+ then the stock could play catch up to the Nasdaq in my opinion.

GOOG $532 Buy Oct 550/ 600 Call Spread for 11.50

-BUY Oct 550 call for 14.50

-Sell Oct 600 Call at 3.00

Break-Even on Oct Expiration:

Profits btwn 561.50 and 600 make up to 38.50, above 600 make full 38.50 (7% of the underlying)

Losses: btwn 550 and 561.50 lose up to 11.50 below 550 lose all 11.50 or about 2% of the underlying…..

TRADE RATIONALE:   GOOG is one of the first large cap tech names to report and if they beat and offer upbeat commentary the stock is likely to run back towards the July highs as names like INTC, MSFT and CSCO have already begun to do.  In  a market like this where we seem to be moving 10% every 10 ten days back and forth I think you want to define your risk when playing events.  Also, I like the risk reward of this spread as the premium outlay is less than 25% of the width of the spread.

GOOG by no means is my favorite name in tech, but if they are able to put together 2 solid quarters in a row under the new CEO Larry Paige, who many were skeptical about, the stock could go from an under-performer to an out-performer in a quick.

This is not a high conviction trade, as I think there is a very good chance that that the trends the company is seeing in ad rates do to the little financial crisis we have been in could cause a hit to margins and cause the company to have less visibility about the balance of the year.  Given the short dated nature of the trade, and buying a slightly out of the money call spread, if you get the direction wrong here you will not likely to be able to salvage much of the premium……