As a contrarian investor, I love a good blood bath, and the beating laid upon Google (NASDAQ:GOOG) last week is a classic example of knee-jerk selling that ignores fundamentals in favor of superficial analysis. The best recent example I can point to is the drubbing that Apple (NASDAQ:AAPL) took back in October after releasing "disappointing" earnings. Apple subsequently dropped from $420 to $365 and is now back at all-time highs. There's no guarantee that Google will experience that same kind of price action, but it's a good bet that Google is a long-term buy at current levels - and I've illustrated several ways to leverage that potential upside via options.
(NOTE: Google closed at $585.99 on Friday - almost exactly midway between its 52-week low of $473 and high of $670. All the scenarios below reside in what I believe are moderate to moderately aggressive plot-points on the risk-reward spectrum. More conservative or aggressive investors would want to adjust the option strikes and duration to match their own risk tolerance levels.)
At the market close on Friday you could have sold June 630 calls for $20.50. On a buy-write trade, you would reduce your cost basis to $565.49 and have a maximum gain of 11.4% if the stock is called away. Alternatively, you could have sold a January 675 call for $29.60, reducing your cost basis to $556.39 and increased your maximum gain to 21.3%.
Unlike many options traders, I prefer to hit a lot of singles and doubles - so my spread trades tend to be on the conservative side. I prefer near-the-money strikes for my long position and target returns of 100% to 150%. This approach also means that my cost basis is higher and I have more capital at risk, so I am very judicious before deciding to act. More aggressive spread trades would begin with a higher long strike price and a lower cost basis - and aim for returns in excess of 200%.
The table below illustrates how I've structured three spreads. Here's how to read the table using the March trade as an example. You could have bought a March call with a strike price of $575 for $27.00, and sold a $605 call for $12.40. Your net cost (and maximum loss) would be $14.60. Your maximum gain would be $15.40 (proceeds of $30.00 minus cost of $14.60) or 105.5%, and Google would have to hit $589.60 (or less than $4 above Friday's close) to break even on the trade.
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Please keep in mind that all numbers would be reduced by transaction costs.