A strategy idea for options trading investors.
TRADE COMMENTARY: GOOGLE (NASDAQ: GOOG)
Google has had quite a run up from its 26-week low of $473. Even though Morgan Stanley downgraded Google, it raised it price target to $600. This made the stock go down $15 Friday. Google earnings are out July 14 and with the stock currently near 530, we don’t think the stock can trade much lower than this after earnings.
I like the risk/reward of this trade. If Google has a big down move after earnings, we are covered at the 485 price level, where we can then short the stock. The December puts we sold are at the 450 level so if the stock breaks below 485 we will have a short stock and short put position on with a 30-point strike differential. In this case the 485 put we bought would be in-the-money with less than a week to expiration, performing like a short stock position. This short position is hedged by the short December put.
If Google has good earnings, the up move in the stock should lower the 450 puts by enough to cover the premium we paid for the front month. We could then buy that back and close the trade down.
This trade has to be watched carefully, like all calendar spreads, especially when you are short the back month. We are willing to be long Google at the 450 price level, and that is basically the highest risk to the trade. If Google has an up move or the stock price stays around here after earnings, the spread should be looked at carefully and closed down if you are not interested in owning the stock at 450 in December.
DATE: July 11, 2011
STOCK/INDEX: GOOG
STOCK PRICE: 530.00
NEXT EARNINGS: July 14, 2011
OPTION PLAY: Calendar Spread
SELL: 1 December 450 Put @ $9.50
BUY: 1 July 485 Put @ $1.70
NET COST (CREDIT): 9.50 – 1.70 = $7.80 Credit
Premium Received from Short Put – Cost of Long Put = Net Credit
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