New Trade $GOOG – Google Eyes

by Enis September 17, 2013 11:29 am • Commentary

We laid out a couple posts about GOOG in August, here and here, speaking to the technical nature of GOOG’s underperformance since May.

Particularly after yesterday’s Nasdaq reversal, I have been stalking for more leading tech stocks that might be at risk of some short-term weakness in the next couple weeks.  GOOG has been on our radar to fade strength ever since its weak earnings report (especially in mobile, though there is reason for optimism in YouTube).

The technical picture now lines up favorably:

Daily chart of GOOG, 50 day ma in pink, 100 day in green, 200 day in black, Courtesy of Bloomberg
Daily chart of GOOG, 50 day ma in pink, 100 day in green, 200 day in black, Courtesy of Bloomberg

The stock has failed to remain above its 50 day moving average, which is now declining.  GOOG’s choppy price action in the past few months makes the options structure choice crucial for a trade at this juncture.  

The $850 support level is the obvious area to watch on the downside.  That will likely be tested again on any broader market weakness (which seems like a better than 50/50 shot here).  We want to target that area with a fly, but do not want to have to sit through earnings to earn the short strike premium.  The trade:

TRADE: GOOG ($885) Bought Oct4th 890/860/830 Put Fly for $7.48

-Bought 1 Oct4th 890 Put for 14.82

-Sold 2 Oct4th 860 Puts at 4.34 each or 8.68 total

-Bought 1 Oct4th 830 Put for 1.34

Break-Even on Oct4th Expiration:

Profits: btwn 882.52 and 837.48 make up to 22.52, max gain of  at 860.

Losses: up to 7.48 btwn 882.52 and 890, and btwn 837.48 and 830, with max loss of 7.48 below 830 and above 890.

Trade Rationale:  GOOG seems poised for some weakness, but we don’t want to hold on to this trade if it does make a run for the $850 support area once again.  As a result, this structure minimizes decay over the next couple weeks, while still offering enough short delta that we would have a decent profit if the stock moved lower quickly.