Taking Advantage of Google's Plummeting Lows

Following the recent covered call position I undertook in Apple (AAPL) shares, noticing the abysmal day on Wednesday, I sold/bought Google (GOOG) puts for a Credit Spread position to take advantage of the rather high prices of options these days. With Google plummeting to new recent lows, I ventured into a position which requires additional substantial losses of close to 20% down within the next month to occur in order to lose money. If Google improves or stays the same, I pocket close to $800. Here's how it works:

Google was around $292 at the time of the trade.

I sold a GOOG 250 Put Dec expiry for 11.12

I bought a GOOG 200 Put Dec expiry for 3.4

This creates the "credit spread."

By December, as long as Google closes above $250/share, I keep the difference between the two positions. If Google drops below $250, I have to pay the difference at expiry to close out the position (but I keep the $770 premium spread, so really, shares must drop to below $243 to lose a dollar). If Google goes bankrupt (as unlikely as it sounds, I don't risk $25,000 to save $340), my max loss is capped at the difference of 5K-770 = $4300.

This is a lot of money and shouldn't be taken lightly. But at the same time, drastic times call for drastic measures and with the markets off over 40% in the U.S. and close to 80% internationally, it's entirely plausible that markets are oversold and at a minimum, we'll see some stability in the coming weeks. We know unemployment is set to rise further and we've been in a recession for some time now. The market has priced that in. But are we going to revert to 1990's share prices?

To new investors; not a trade for you. Research options thoroughly and start with covered calls if anything. To experienced options traders, what are your thoughts and what trades are you making right now?

Disclosure: The author owns a GOOG Put.

Comments

[LA Tech:]

Why purchase ANY tech stock during these very crazy investing daze? Especially, companies who are as poorly managed as Google!

2008 Nov 13 06:51 AM

[Robpriore:]

No question this market is almost inexplicable. However, I had a strong sense this was coming and took steps to insure long positions by making several trades on DJX puts. The DJX is a tracking index for the Dow. Those positions helped stabilize my portfolio and I still have downside protection for some profit if the market continues to fall. I agree with the author's thesis that the market has been oversold though I don't think we should expect any major rebound of the indexes as several macroeconomic factors are not yet priced into the indexes, such as credit card and auto loan default rates. I expect a meaningful turnaround when all the skeletons are out of the closet, so to speak. Now, I do expect a market rally to occur within the next week or two driven by short covering and value investors. In that light I have call positions on GOOG, DECK, and AAPL. GOOG especially reacts strongly to positive market moves. And for long term investors it just might be that GOOG at 290 is a once in a lifetime opportunity. Just don't mortgage your house to buy it.

2008 Nov 13 07:25 AM

[andyn:]

Stupid to be short a put in this market.

$250 might be a long way off but to think that GOOG is below $300 is already crazy. P/E contraction is happening at a scary pace and there are no signs that the economy is going to recover anytime soon.

If you want to put in cash into this market, just buy a high-yielding one so that atleast you get something in return while you wait for the recovery in stocks.

2008 Nov 13 09:38 AM

[Everyday Fi...:]

Wow, feeling stupid already with markets down 4% again today; keeping my fingers crossed (at least Google's holding its own today)! But on the high yield; as long as sustainable, great move in this market as well. I recently posted on high yield munis and some other options, but just today, GE reaffirmed its dividend through 09, which is at 7% yield at this horrendouse prices. Never thought I'd see the day I could buy GE yielding 7%. May jump on that.

Other favs?

2008 Nov 13 01:09 PM

[Everyday Fi...:]

What a reversal! Bought into GE, up 15% by market close with an 8% yield to boot. Google credit spread up hundreds as well.

Only one day, but hey, can't complain about the timing!

2008 Nov 13 10:09 PM