Earlier, Dan previewed GOOGL earnings due after the close. I wanted to detail a couple of trade ideas based on the assumption of long stock. Some readers are long GOOGL stock and these trades can be of help, but even if you are not long GOOGL stock these are great examples of how options can be used around events to add yield and define risk and can be applied to your own holdings in similar fashion:
Adding leverage to long stock:
vs 100 shares of GOOGL ($768) Buy 1 Feb 795/825 1×2 call spread for even money
- Buy 1 Feb 795 call for $19
- Sell 2 Feb 825 calls at $9.50 each ($19 total)
Break-even on February expiration: Gains in the stock up to $825, additional gains of up to $30 (the distance between the call spread) between $795 and $825. Above 795 the position becomes leveraged with twice the gains up to 825. At 825 the stock is called away but at an effective sale of $855. The ideal situation is a move to 825 where the maximum gain is realized and no profits in the stock are missed. At 825 it is as if the stock has gained an extra $30 due to the leverage added. Below 795 the position has no effect on the stock.
Think of it this way, long stock with a leveraged overwrite. So long 100 shares of stock, short 1 call against it. Then also long a 795/825 call spread which you could gain the max value of the spread, on top of the stock’s gains up to $825. If you are already long stock, like the idea of adding leverage, are not particularly worried about too much downside, and are willing to be effectively called away at $855, this trade idea makes sense.
Rationale – This trade idea is for those looking to add leverage to a holding. It is not for those looking to define risk or protect against a decline.
Hedging Long Stock
vs 100 shares GOOGL ($768) Sell the Feb 850 call to buy the Feb 730/680 put spread for $5
- Sell 1 Feb 850 call at 5
- Buy 1 Feb 730 put for 14.30
- Sell 1 Feb 680 put at 4.30
Break-even on February expiration: Gains in the stock higher to 850 at which called away in the stock for an effective sale price of 845. Losses in the stock down to 730 but below that hedged until 680 (less $5 paid) decline that takes the stock below 700.
Rationale – This 3 legged protective trade defines risk and protects against a sharp decline. It costs next to nothing to put on (slightly more than half a percent of the underlying) yet provides realistic protection to your shares. The trade-off for the low cost is that it’s financed by selling an upside call but the sale at 850 is 10% higher and well above the all time highs.