We’re currently running through an earnings season that has failed to impress from a stock price perspective. We’ve seen great reports from the likes of Tesla Motors Inc (NASDAQ:TSLA), Facebook Inc (NASDAQ:FB), and Amazon.com, Inc (NASDAQ:AMZN) yet they failed to hold the earnings spikes.
We did have a few exceptions that were able to impress and hold their new highs. Netflix, Inc. (NASDAQ:NFLX) was one of them.
Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) is another that has failed to maintain the highs of the earnings reaction.
I usually don’t trade earnings, as the short-term reaction to a report is a complete coin flip. Even if we know the numbers, we cannot foretell how Wall Street will interpret them. Case in point: TSLA. They report an incredible beat with profits, yet it spikes then fails and now back under $200 per share.
Click to Enlarge Now that Alphabet reported its earnings, I can set a mid-term trade to range it for the remainder of the year. The earnings report told me that they are still on track as a money-printing machine with no unusual Google-specific issues. So if the general markets hold, GOOGL stock should trade with no surprises.
Now that I have visibility over their business, I can set a trade with a bit more conviction. Here I want to capture premium sold against levels I see as support and resistance. In light of the election outcome, tight stops should be in order.
GOOGL Stock Trades
Trade No. 1 — The Bet: Sell Dec $740/$735 credit put spread. This is a bullish trade for which I collect 60 cents per contract. From current levels, I have a 7% price buffer and an 85%-plus theoretical chance of success. The reward if successful is an 8% yield on money risked.
Trade No. 2 — The Hedge: Sell Dec $865/$870 credit call spread. This is a bearish trade for which I collect 35 cents per contract. Ideally I need price to stay below my sold spread while I am in the trade. My price buffer from the current level is 8%. Since February, the upside risk has been the tougher of the two sides to manage, as markets are acting reckless in the face of uncertainty.
Taking both sides of this setup puts me in a sold iron condor for December. To succeed, I need GOOGL stock to stay between both spreads sold through mid-December. Combined I collect a total of 95 cents per contract to open. If successful, this would yield 25% on money risked overall. The yield doubles by taking both trades because my total dollars at risk drops … I can only lose on one side.
I am not required to hold either trade through expiration. I can close either at any time for partial gains or losses.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
