How to play GOOG Earnings : Part-3
31Jan2007 Filed under: Earnings Author: OptionPunditRecap :I reviewed directional option trading strategies in Part-1 then I discussed (OP reader Avi’s) one non-directional option strategy in Part-2. Now I am going to share another non-directional strategy i.e. backspread (Opposite of backratio) for Google earnings. Here is what the trade might look like:
- Sell x call GOOG Jan 470 and purchase 2x Feb call GOOG 510. Credit received is $855/backspread and margin required is $3145.
- The break even points are $478 and $540
- Here is the risk/reward chart –>
Just one of many more ways to play non-directional. Risks associated with this strategy are mainly two i.e. 1) if GOOG remains in between $478 and $540 by Feb expiration and if we don’t take any action we’ll lose money, and 2) When the volatility drops after earning annoouncement, it is going to hurt my long options.
If you would like to know about backspread, please click here Backspread
Cheers and good luck,
Profitable trading, OptionPundit
Earnings2 Responses to “How to play GOOG Earnings : Part-3”
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chiu
January 31st, 2007 at 11:01 pm
It is really a wonderful and tremoudous effort to analyse the earning event for GOOG by you. This also shows your wealth of knowledge in this field.
However, I find it really difficult to put on any strategy for this case. In my mind, it might be a similar case to recent AAPL event, stock price gradually moves up toward the earning date, price drops with good company performance. Furhter more from the past few earning events, the GOOG price moves about 5-12% when it moves with the earning announcement. With the stock price at historical high, that will require a move of $25-$60 either way, for which I find it difficult. Backspread might be non-directional strategy but in this case, it needs to move a lot to break even for which I am not comfortable. As a result, I did not put on a trade.
In any case, it is really a wonderful site to see an indepth analysis for such kind of event. Do keep it up.
GOOG Earning plays : 3 Profit out of 4 at OptionPundit
February 1st, 2007 at 11:50 am
[...] 2nd trade was based on what OP reader Avi had suggested here. My credit was $3.24 and I bought it back for nearly $0. So I am able to keep all the credit received. The returns on margin are 6%. [...]