by Tyler Craig | January 29, 2014 5:47 am
With Apple (AAPL) earnings in the rear-view mirror, the earnings spotlight now turns to the next titan of the tech space — Google (GOOG). The king of search is slated to report its latest earnings on Thursday after the closing bell. No doubt shareholders are hoping for a repeat of last quarter’s earnings bonanza that sent Google stock north of $1,000 per share for the first time in its history.
As the main event approaches risk, expectations have ratcheted aggressively higher. Spurred by the sharp two-day selloff in Google stock (and perhaps increased anxiety surrounding earnings later this week), the CBOE GOOGLE VIX (VXGOG) has jumped to 34%, its loftiest level in more than a year.
In gauging expectations for the post-earnings gap, we can use the January weekly options set to expire this Friday. The Jan 1,120 straddle currently is trading for $65.25, effectively pricing in a 6% move in Google stock by week’s end.
With implied volatility resting at the upper end of its two-year range, short volatility plays heading into the Thursday Google earnings report seems like the way to go.
Traders anticipating a somewhat muted reaction in Google stock following earnings could exploit the elevated option premiums by entering a February iron condor. Sell the Feb 1,245-1,250 bear call spread along with the Feb 1,000-995 bull put spread for a total net credit around $1. The max reward is limited to the initial $1 credit and will be captured as long as GOOG remains between 1245 and 1000 by expiration for these Feb monthly options on Feb. 21.
The range that Google stock needs to remain within for you to capture the max reward is shown in the shaded green area of the accompanying chart.
The max risk is limited to the spread between strikes minus the net credit, or $4.
To reduce the risk, however, consider exiting the bear call spread if Google stock rises above the short call strike at 1245 or the bull put spread if GOOG falls below the short put strike at $1,000.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
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