One of the many benefits of the introduction of weekly options is the availability to use one of the better earnings strategies around: the 'reverse iron condor' spread.
The 'reverse iron condor' spread is a neutral-based strategy that is a limited risk and a limited profit option trade.
The 'reverse iron condor' spread is a strategy that is placed with a net debit instead of a net credit to the buyer, and can be placed with a lower level trading account. Most brokers will let you place this trade if you are approved with a Level 2 or Level 3. Please check with your broker, and if not approved, you can also request to be upgraded.
There is a very healthy return awaiting if the stock should make even a modest move after reporting earnings.
I have always been extremely successful using this strategy with stocks that have historically made moderate to large price moves after reporting earnings. Please see my past articles on this excellent strategy and others.
Years ago, I realized that taking one side of an earnings trade was the equivalent of playing roulette. Sure, it might go your way. Yet, if it does not, then you are going to lose a lot of money. The last time I took one side of a trade (it was using only call options) was with Research In Motion (RIMM) back in 2008. The results of that trade were disastrous. I promised I would never do that again.
Google (GOOG) is scheduled to report earnings on Thursday, April 12, 2012, after the market closes. Currently, Google is trading at $632.32/share. The 52-week range is $473.02 - $670.25.
The 'reverse iron condor' has four (4) legs. Here is how the trade is placed accurately. (For example purposes, I will only use one contract for each leg):
- Buy one (1) out-of-the-money put option
- Sell one (1) out-of-the-money put option (LOWER STRIKE)
- Buy one (1) out-of-the-money call option
- Sell one (1) out-of-the-money call option (HIGHER STRIKE)
What I like about this trade is that the weekly options expiration will expire the next day, on Friday. I am completely confident that the trade recommendation I am writing about will work like a charm.
It should be noted that it is extremely important that you not overpay for any options trade. This includes only using limit orders and go only mid-point between the bid/ask price. Often, many new options traders will place a market order and overpay. This will kill your profits, trust me.
As to the trade and the strike prices for this Google earnings release, they are the following: (Note: you can increase or decrease the number of contracts based on your own investment choice.)
- Buy twenty (20) April Week 2 $610.00 put options
- Sell twenty (20) April Week 2 $600.00 put options
- Buy twenty (20) April Week 2 $650.00 call options
- Sell twenty (20) April Week 2 $660.00 call options
Current Price: $630.84
|Price||Profit / Loss||ROI %|
In my opinion, this is a trade that you hold through earnings. Google is a notorious big-mover after reporting. Here is a closer look at their last four earnings releases and what the stock did both before and after the release:
On January 19, 2011, Google reported their fourth-quarter earnings. The stock saw the following price move:
|Jan 20, 2012||590.53||591.00||581.70||585.99||10,576,774|
|Jan 19, 2012||640.99||640.99||631.46||639.57||6,305,274|
|Jan 18, 2012||626.63||634.00||622.12||632.91||2,763,190|
On October 13, 2011, Google reported their third-quarter earnings. The stock saw the following price move:
|Oct 14, 2011||599.47||599.60||587.57||591.68||8,532,242|
|Oct 13, 2011||550.03||559.00||548.02||558.99||5,687,512|
|Oct 12, 2011||548.13||555.23||544.63||548.50||3,178,044|
On July 14, 2011, Google reported their second-quarter earnings. The stock saw the following price move:
|Jul 15, 2011||597.50||600.25||588.16||597.62||13,735,983|
|Jul 14, 2011||539.12||542.00||526.73||528.94||6,649,410|
|Jul 13, 2011||537.00||544.00||536.48||538.26||2,790,771|
On April 14, 2011, Google reported their first-quarter earnings. The stock saw the following price move:
|Apr 15, 2011||533.31||533.31||533.31||533.31||14,043,700|
|Apr 14, 2011||575.19||579.45||572.10||578.51||5,456,289|
|Apr 13, 2011||575.51||577.60||571.75||576.28||2,071,646|
As you can see, Google is a solid play using a 'reverse iron condor' spread. When I write an article, I feel it is imperative to show some back data that proves the point. This is setting up to be a great trade with a very healthy ROI that is neutrally biased.
If you have any questions, please leave a comment or send me an e-mail. I will have a flurry of earnings trades in the coming weeks. Good luck.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GOOG over the next 72 hours.