New Trade in GOOG

• stevenplace
• April 14th, 2011

I’m opening this up to the public. I’ve no idea whether this trade will work or not, but it shows my thought process going into an earnings trade.

Warning: advanced trade up ahead, there’s a lot of stuff going on in the background.

First, a daily chart of GOOG:

The stock has been rangebound between key support and resistance, as well as the 50/200 acting as strong areas. Larger support/res are at 630/510.

Here’s some numbers, we’re comparing what the market has priced in over the past 4 earnings and what acutally happened:

We see that most of the time the market prices in about a 4.5% move, but we’ve only been inside that range this past earnings event, and that was coming on some serious volatility as well.

The average move is around 7%, so an upside expectation of 616 and downside of 535. If we got those extremes, that means GOOG’s range has broken, but the extreme boundaries held.

I think there’s a play here where we look for a strong move, but not an absolute blowout move. We’ll be taking a double calendar trade, where we pick strikes that are wider than what the current market is pricing.

Here’s our earnings risk:

As I’ve said before, it’s not this sexy. There will be a volatility crush in our long options as well, so expect a good profit out of here to be +300. We’ll look for more but I just want to manage expectations.

So 3 scenarios:

- GOOG doesn’t move. Our sold options expire worthless (good) and our back month options see a volatility crush (bad). In this scenario, the bad will outweigh the good and we’ll have a loss.

- GOOG sees a strong move to +/- 7%. This is an optimal situation. From there we will start to unwind the trade.

- GOOG goes to 0 or 5000. Our max risk is the total debit paid which is -2500

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.

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