On Sept 13th I detailed a bullish options strategy to set up for tonight’s Q3 earnings report in Alphabet (GOOGL), read here. At the time, shares of GOOGL were trading $1235, and Identified playing for a breakout to new all-time highs post results via a call calendar, here was the trade and rationale:
If you think there is a chance the stock puts up similar results in Q3 and can guide higher for Q4, then I suspect investors will be gunning this stock into year-end above the prior highs at $1300. It makes sense after the recent 7% rally in the stock to look to play for a sort of near term consolidation, and look to finance calls that will catch the earnings event in Nov expiration by selling some shorted dated out of the money premium that does not catch earnings. This trade structure is called a call calendar and here is one that make sense if you think that GOOGL can test or make new highs post their Q3 results in late October…
BULLISH TRADE IDEA: GOOGL ($1235) BUY OCT – NOV 1300 CALL CALENDAR FOR $15
-Sell to open 1 Oct 1300 call at $6
-Buy to open 1 Nov 1300 call or $21
Break-even on Oct expiration:
This trade performs best with a gradual move towards the 1300 strike over the next five weeks into Oct expiration. If the stock is below 1300 Oct expiration the short 1300 call will expire worthless and the trade will be left naked long the Nov 1300 call. If the stock is close to 1300 then the Nov 1300 call should have appreciated as it will have picked up deltas. At that point, it might make sense to further reduce the premium at risk by selling a higher strike call in Nov turning the trade into a vertical call spread. The max risk f this trade is the $15 premium paid, and would be at risk with a large move below the current level, or well above the 1300 strike.
On Oct 18th expiration the stock closed $1244, meaning that the short leg of the calendar would have expired worthless with the stock below the strike, leaving this trade long the Nov 1300 calls. Now with the stock trading $1292 a couple of hours before results, the Nov 1300 calls are trading at $32, a little more than double the initial cost of the trade.
Before considering our options, lets first consider the set-up into the print.
The options market is implying about a $60 move in either direction or about 4.5% between now and Friday’s close, most of that move, lets call it about 4% is for tomorrow’s reaction, which is a little shy of the average one day move over the last four quarters.
So how you manage this trades depends largely on whether or not you think the stock will breakout tomorrow. And it is worth noting that the all-time high came on the close prior to their Q1 results on April 29th, before its massive 7.5% one day gap the next day lower that resulted in a 20% peak to trough decline into early June:
So what to do?
If you have any hesitation that the stock could rise, let alone break-out, then it makes sense to close the trade and take the double.
If you think the stock will make a new high, but not have the sort of gap higher that it did following last quarter in late July, then it makes sense to spread the long Nov 1300 call, possibly selling the Nov 1360 call at $10, leaving you long the Nov 1300 – 1360 call spread for just $10. If the stock is up $60 in line with the implied weekly move then you would have risked $10 to make $50. If you get the direction wrong and the stock is down then you risked less than 1% of the stock price.
If you think the stock breaks out and continues to run as Apple (AAPL) has done in the last couple weeks, then sit on your hands and let it run.