GOOG Earnings Trade Analysis

• stevenplace
• October 19th, 2009

After some “issues” selling vol in ADBE, RIMM, and ORCL… GOOG paid very well. Also, the stock is very fun to trade around earnings as it’s generally close to options expiration.

After a strong run in price prior to earnings, I expected a tighter range than what the options were pricing in. So that meant selling vol. There’s of course a couple ways to go about this.

I first thought about selling a straddle or strangle, but I never really like going with unlimited risk with GOOG. That move it had back in 2007 makes me a little hesitant with that trade.

I also thought about selling an iron condor going in, but I felt that the risk reward wasn’t exactly justified.

Instead, I chose to go into a double calendar. This is a limited, risk, limited reward trade. You go about it by selling the front month (both puts and calls) and then buy the back month, with the same price strike.

So there’s a couple risks here. First if the price swings too wide, you’re going to get stuck short on one side. The second (and less obvious) risk is that the options on the back month that you bought will lose too much extrinsic (from the implied volatility drop) and the trade will be close to a scratch.

Here’s the trade I sent out to my subscribers via email and blog post:

GOOG reports tonight, and I believe that the implied volatility in the front
month options is overvalued relative to the expected move. So we will be
working into a double calendar spread.
Buy +2 GOOG 520 Oct/Nov Calendars for 870
Buy +2 GOOG 550 Oct/Nov Calendars for 890

Here’s what the risk profile looked like:

A nice wide area of profitability, right? Well, that’s assuming the back month vol doesn’t fall.

The total cost was about 17.50 and we exited out for about 22, giving us a gain of 26%, or a gain of about 900. Not bad for an overnight trade in our 40K portfolio.

If you’re interested in more trades like this, you should check out my premium service.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

Tickers: goog

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