Recap: I presented past earning data, sentiments, key development and some business data about google in Part-1 and Part-2, and Part-3. Now Let’s discuss how to play this.
The search is on for way to play GOOG earnings. This quarter, Google earnings are not in the options expiration week and therefore premiums are expensive in absolute dollars. One therefore needs to be very cautious while choosing a speculative option trading strategy for Google earnings.
The volatility has risen from roughly 30% to 40%. From the past analysis, after earnings announcement, generally IV drops by 6-10%. So I would expect a move anywhere between 6-10% which in turns mean, Google might move roughly $30-$40 in either direction.
Here are couple of thoughts, if you are looking for a “directional” move:
- One can either play straight call or straight put depending upon the perspective. Now which call or which put? If we are expecting a $30-$40 move, that means $530 call or $470 put might be a better trade vs. near the money call or put. However, it will cost roughly $6 dollars for $540 call and $10 for $470 put at the time of writing.
- If one want to play bullish or bearish direction but don’t want to risk too much, there are other ways i.e. Bullish 530/540 call will cost roughly $2 and Bearish $470/460 put vertical will cost $2.80 to $3.00. One can also use credit spread if wishes to.
The crux of the two points is, depending upon outlook for google, one can play google earnings in roughly 6 ways (Bull put, bear call, bull call, bear put, straight call, and straight put). There may be other ways, but I think these six may be most common.
In the next section, I shall talk about if one doesn’t want to play direction. Feel free to share your thoughts and comments.
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very “expensive” premium cost for straight call and straight put player. I think bull call and bear put is quite good strategy to reduce cost for premium.
may i know what do you mean by “one doesn’t want to play direction”. Do you mean that the one predict no big movement for GOOG tomorrow? Or strategy can make money in both way? It sounds interesting.
Ty
The risk with bull put and bear call is that you are still betting on a certain direction. If the stock moves against you, you will end up losing. You should have stop loss in place if you are going in a directional trade. In case of GOOG, stop losses will be quite meaningless because the stop loss will be most likely be triggered as GOOG gaps significantly after earnings.
If you dont want to play direction, you play a strategy that makes you money or limits your risk no matter what direction the stock moves in.
In my earlier post on part 3 of Goog earnings, I had written the strategy i am playing. I have entered 2 backratio spreads giving me net credit.
You can read my post on goog earnings part 3
discussion thread.
Cheers