Cash In on a Surging GOOG With This Credit Spread

by John Kmiecik | October 24, 2013 11:09 am

Cash In on a Surging GOOG With This Credit Spread

Earnings continue to roll as a couple of the big boys have announced their results, and many more are to follow soon. Trades held over earnings announcements, can be very high-risk, high-reward. But not all trades need to be held over the earnings. Here’s a trade idea for a company that has already announced earnings and is one of the hottest stocks trading right now: Google (GOOG[1]).

Google Inc. (GOOG –1,031.41): Put Credit Spread

The trade: Sell the November 995/1000 Put Credit Spread (selling the November 1000 put and buying the November 995 put) for 0.80 or better.

The strategy: The maximum potential profit for this trade is $0.80 if GOOG is trading above $1,000 at November expiration. The maximum loss is $4.20 (5 – .80) if GOOG is trading below $995 at November expiration. Breakeven is $999.20 at expiration based on a credit of $0.80.

The rationale: Google just recently announced earnings and the company surprised most analysts by blowing away the estimates. Third-quarter revenues grew about 12% over the year, and revenues from Google’s sites grew 22%. Earnings per share were almost 40 cents ahead of expectations.

According to a recent report, Google has about 41% of the online advertising market share, making it the dominant market leader. Google also is the mobile advertising leader with a market share of around 53%. That market share is expected to be reduced thanks to Facebook (FB[2]) but Google is expected to increase its digital advertising market share.

Even though the implied volatility and premiums of the options has decreased after earnings, there may still be an opportunity here to profit from selling a put spread. The stock closed above $1,000 after announcing earnings the night before and has not closed below that level since. The stock surged higher on Wednesday, and if that momentum continues, this trade idea should be in good shape.

The stock may now be a little extended and could struggle to move much higher. So far, the $1,000 level has acted as minor support and held. It could also be viewed as a psychological level that buyers may defend. I have said it before, and I’ll say it again …go GOOG go!

As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities. Get a free trial of John’s live options trading room here[3].

Endnotes:
  1. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  2. FB: http://studio-5.financialcontent.com/investplace/quote?Symbol=FB
  3. free trial of John’s live options trading room here: http://markettaker.com/options_insider_trial/

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