A strategy idea for options trading investors.
TRADE COMMENTARY: Google (NASDAQ: GOOG)
The Federal Trade Commission is currently preparing to serve subpoenas on Google CEO Larry Page and Chairman Eric Schmidt in a wide-ranging antitrust probe as the feds, along with European regulators, investigate the company’s dominance over the web. This news has produced a negative sentiment among investors and the stock has since fallen over 2%.
We believe Google (NASDAQ: GOOG) has further downside potential, especially if the broad market continues to sell off. The position we have constructed is designed to capitalize on our bearish view while also limiting risk to the upside. In today’s volatile environment, it is important to cap your risk and know your exposure.
OPTIONS TRADE: GOOG WEEKLY expiring JULY 1.
** Prices are approximate — Check the option chains for current pricing. Also – 1 option equals 100 shares of stock so option prices require multiple of 100.
DATE: Friday, June 24, 2011
STOCK/INDEX: GOOG
STOCK PRICE: 480.00
OPTION PLAY: Synthetic Long Put
BUY/STRIKE/MONTH/PRICE: 1 June5 (Weekly) 465 Put @ $3.70
SELL/STRIKE/MONTH/PRICE: 1 June5 (Weekly) 490 Call @ 1.85
BUY/STRIKE/MONTH/PRICE: 1 June5 (Weekly) 500 Call @ $0.65
NET COST: 3.70 – (1.85 – 0.65) = $2.50
I.E.: (100 x 3.70) – 100 x (1.85 – 0.65) = $250.00
I.E.: Cost of Put – (Credit from Call Spread)
BREAKEVEN: 465 – 3.70 + (1.85 – 0.65) = 462.50
MAX PROFIT: Unlimited
MAX LOSS: 100 x [(500 – 490) +$2.50 net cost] = $1,250
I.E.: Difference between call strikes + net cost = Max loss
Should GOOG trade to 460 before next Friday’s expiration, we suggest selling the 460 put for a profit and allowing the 490/500 call spread to expire worthless.
Stutland Equities is a premier futures and options trading company on the Chicago Board Options Exchange. Founded in 2005 and headquartered in Chicago, Stutland Equities specializes in volatility arbitrage across multiple asset classes.
