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Portfolio strategy, contrarian, short-term horizon, medium-term horizon
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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.)

BUY-WRITE:

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%.

VERTICAL SPREAD

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.

click to enlarge

Please keep in mind that all numbers would be reduced by transaction costs.

Source: Options Strategies To Profit From Google's Blood Bath