Update on My Google Credit Spread Position

After my post on entering into a credit spread on Google in November with December options expiry, some readers asked me to comment along the way and provide an update upon close of the position. Well, as I had anticipated, Google did not close in Dec. below $250 per share, so I got to capture the full spread of close to $800 for 1.5 months of protected downside risk. See this article for full background of the transaction.

Credit spreads are actually quite easy and you can limit your risk as opposed to entering into naked options positions, which is wrought with much higher risk.

If I wanted to duplicate the same type of position today, I could assume that between now and March expiry, Google won't drop another 20% from its current depressed valuation and walk away with another $800 with a maximum downside risk of $5000 if Google dropped all the way to $190 per share, as unlikely as it is:

Sell the March $240 Put for 12.50

Buy the March $190 Put for 4.20

Total Profit = ~$820 net of fees.

Total Risk = $5000 in catastrophic scenario

While volatility has dropped a bit since its peak when I entered into various options-selling strategies, by simply taking on an extra month of expiry and maintaining the same risk, I can roughly mimic the same play time after time.

Note of course, that the market is pricing in some probability that this target price will be reached or else nobody would be buying the option from you. Know your risks before engaging in this type of options play!

Disclosure: The author is currently long GOOG shares and has no active options positions.