Frugal in GOOGL – Q4 Earnings Preview and Roll

by Dan January 26, 2017 8:08 pm • Trade Ideas

Event: Alphabet (GOOGL) will report Q4 results tonight after the close. The options market is implying about a 3.75% one day move tomorrow, in either direction. That’s rich to the 4 qtr average move of about 2.5%, but shy of the 10 year average of about 5.5%.

With the stock at $855, the tomorrow expiration 855 straddle (the call premium + the put premium) is offered at $32, if you bought that, and thus the implied earnings move you would need a rally above $887, or a decline below $823 by tomorrow’s close to make money, or about 3.75% in either direction.

Back in early December when GOOGL was $805 we made the case why Alphabet (GOOGL) could play a little catch up to the broad market and play a little catch-up to the broad market and make a run back to its prior all time highs using a risk reversal in February (GOOGL Eyes), here was the trade idea and rationale, targeting tonight’s earnings. From December 9th:

And discussed that evening on CNBC’s Options Action:

With the stock now 855 this trade is worth about 22, versus the even money entry. As far as trade management this should now be rolled. There’s a couple ways to do that. One would simply be to roll the strikes of the existing trade higher, turning it into the 800 put/875 risk reversal books about 15 dollars of the gains so far as has unlimited potential above 875. But it also has unlimited risk below 800 like stock, so it’s only for those willing to own GOOGL for 800 on an earnings gap lower.

A roll we prefer is to define risk entirely, using the house money from the successful risk reversal and keeping the long 850 call, but closing the short 760 put and then establishing a call fly targeting 900. Here’s how that would look: [Note, this is not intended as a new trade idea, it is a roll to a trade from December]

Buy to to close the GOOGL ($855) Feb 760 put for 1.70

Sell to open 2 Feb 900 calls at 5.60 (11.20 total)

Buy to open 1 Feb 950 call for 1.00

New position GOOGL (855) Long the Feb 850/900/950 call fly for a $13 credit

Rationale – This trade books more than half of the current gains and can add up to $50 in additional gains if the stock is $900 on February expiration. If the stock closes below 850 on Feb expiration, the rest of the current gains are lost, but the net gains between the two trades is still $13. This roll is for those that would like to target the next leg higher to 900, but want to take off all risk of a move below aside from some of their current gains.