Dan previewed Alphabet’s (GOOGL) earnings due after the close in an earlier post. Here’s what he had to say on the likely stock reaction to the news:
My view into the print: If TAC increases for the second straight quarter and operating margins decline due to increase spending than the likelihood of a new high in the stock is hard to ponder prior to their Q3 results due in Oct. On the flip-side, a beat end raise and the stock is up in line with the implied move up near $800.
As Dan mentioned, the stock is up 13% in a straight line in the last month or so. It remains below its highs around 800 and is basically exactly where it started on the first day of 2016 trading. So 800 is certainly a level to watch on the upside (and position for) and 700 on the downside was prior resistance that has since become support in 2016.
So What’s The Trade?
Defined risk long biased for GOOGL:
GOOGL ($764) Buy the Jul29th/ September 800 call calendar for 5.00
- Sell 1 July29th 800 call at 6.50
- Buy 1 September 800 call for 11.50
Rationale – This uses the previous highs as a level, and the pumped vol in the options that expire this week to finance a call for a potential break-out in GOOGL over the next few months. The most that can be lost on this trade is 5.00. The way that 5 dollars is lost is if the stock is substantially lower on earnings, if it goes nowhere for the next 2 months, or if it gaps substantially higher on earnings tonight. On the flipside, if the stock doesn’t move much, or is it is higher on earnings along the lines of the implied move (the implied move is about $50) this trade has the opportunity to be a very inexpensive way to own an upside call for a breakout following the earnings move. If you look at GOOGL stock it has a habit of spending a lot of time around it 100 dollar intervals, before breakouts. In the past 2 years it failed at 600, retreated to 500, then worked its way back to 600, before a straight line higher to 700. It then failed at 700, revisited 600, and is now working its way back towards 800. It’s likely that it once again consolidates at 800 before it goes higher. This is the structure for that move. Of course if it goes up 100 dollars on a gap, this is not the trade for that. But again, the most that can be lost is $5, even if that were to happen. So it has good risk/reward, because if it does stall at 800 on the upside before tomorrow’s close you would then own an at the money call for a possible breakout over the next 2 months.
I’LL OFFER OUR USUAL DISCLAIMER FOR LONG PREMIUM DIRECTIONAL TRADES INTO EVENTS LIKE EARNINGS. YOU NEED TO GET A LOT OF THINGS RIGHT TO JUST BREAK-EVEN, NOTHING MORE IMPORTANT THAN DIRECTION, TIMING AND MAGNITUDE OF THE MOVE.
This defines risk down to $5, but on a move lower or a massive gap higher that $5 is at risk.
What if you’re long GOOGL shares already and want to protect against some massive move lower but would like to at least hold on to your shares up to the all time highs?:
Hedge vs 100 shares of GOOGL (764) Buy July29th weekly 820 /720 Collar for $1.25
- Sell to open 1 July 29th weekly 820 call at 2.75
- Buy to open 1 July 29th weekly 720 put for 4.00
Rationale – Like I said earlier, GOOGL is more likely than not to find resistance in the 800 vicinity. But the all time high intra-day high made back in February was 810. This collar goes just beyond that to sell a call and finance protection just 40 or so dollar lower at 720. Were the stock to gap higher on a better than expected report, the stock could find resistance at the prior highs and this collar would be fine and just cost the 1.25 spent for protection. Gains above 820 would be capped (less the 1.25 spent). But this is mainly for protection, and if the stock were to miss and guide lower, thestock is protected below 720 and unlimited disaster protection below. If the stock is between 720 and 820 you would lose the $1.25 premium paid for the collar, and have gains or losses of the stock above or below current levels until 720 or 820.