After reviewing directional trades in Part-1, I am going to mention some non-directional trades. Let me begin by mentioning one of the strategy that OP reader Avi has shared. According to Avi,

“I am tempted to go in and collect money no matter which side the stock moves. I am thinking of going in with backratio spread. The trade will be:

• Buy x contracts FEB540C and sell 2x FEB550C. This gives a credit of $XYZ
• Buy x contracts of FEB 450P and sell 2x contracts of FEB 440P. this gives a credit of $ABC per contract.

If GOOG moves up, the put backratio trade goes worthless and I get to keep $ABC. I will also buy back 550C and let 540C run up.  If GOOG moves down, my Call backratio spread becomes worthless and I buy my 440P back, letting 450P run up. If you want to take more credit, you can even consider doing backratio for Mar on same bid/ask.” 

Here are my thoughts on the trade:

“This is quite an interesting trade and this will make money as long as GOOG remains in between $426 and $562 by Feb expiration. Potential gains, $330 (most likely) to $1200 depending upon where stock will be by expiration. Margin required is over $5330. The risk to reward is 6%.

Besides very low reward to risk ration, other issue that I see with Ratio spreads is that the risk is HUGE. If for whatever reason there is extreme reaction in either direction ,the losses will significant.”

I have initiated a paper trade to experiment:

Here is the risk/reward chart if one wants to play it tonight:

Profitable trading, OptionPundit

Here is an update on closure of my credit spread for PCP which I mentioned here. I opened that trade for a credit $1.25 and with Margin $3.75. The logic for the trade was, directional as it was breaking out of the resistance zone.  I bought back the spread for $0.40 (rationale was that risk/reward was not good now, I wanted to release margin so I can use somewhere else). This credit spread resulted in 22.67% profit for holding period of 1 week.
Here is the closure of transaction.

 Cheers and profitable trading,

OptionPundit

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:

1. 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.
2. 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.