On Friday we previewed Alphabet’s (GOOGL) Q2 results that were released last night (read here). My take was simple, the stock, despite expectations for 30% eps growth and 20% sales growth in 2018 is priced for perfection in the face of increased costs related to traffic acquisition, looming regulatory hurdles, heated cloud competition and increased search competition from the likes of AMZN. It was my thought that the company would offer cautious guidance and the stock would be back on its way to the important technical level of $1000. I detailed the following strategy to express a near-term bearish view with defined risk:
TRADE IDEA: GOOGL ($1083) BUY MAY 1080 PUT FOR $35
Break-even on May expiration:Profits below 1045
Losses of up to 35, between 1080 and 1045
And discussed the view and the trade idea on Friday’s Options Action on CNBC:
Alphabet reports earnings after the bell today @RiskReversal things the stock could run into trouble $GOOGL pic.twitter.com/0s0nBfGSc1
— Options Action (@OptionsAction) April 23, 2018
The company’s Q1 report had a little something for both bulls and bears on the stock (read here, here, & here). But for this trade, I think it makes sense to consider what is going to happen to a long premium shorted dated options trade like this. The implied move into the print was about 5.5% in either direction, which means for those who picked a direction and were long near the money puts or calls, they need about half the 5.5% implied move to just break-even. But here is the thing, with the stock down about $10 in the pre-market, or less than 1%, this is disastrous for those playing for movement via long puts or calls, but a lot worse (for now for those long calls). Here is the thing, the increased delta in the puts resulting from the stock’s small decline should help off-set the post-earnings vol crush that will occur after the open. But at this point, it is a matter of conviction on further declines despite the lack of a post-earnings gap that was initially targeted to be the catalyst for a move back to $1000.
So what’s a trader to do? Without the momentum of a gap it is very much a coinflip of how this trade works out and the only certainty this morning is that the May 1080 puts are going to see lots of the extrinsic premium that was priced into them for the “earnings move” come out this morning.
At this point, lacking a very convicted view that the stock will continue to decline it makes sense to close this position for a small gain.
The fact that the stock is down a smidge given the beat tells you that sentiment is clearly glass half empty.