As I often cite in many of my articles here on Seeking Alpha, using my daily options trading strategy, which uses nine main stocks, Apple (AAPL), CF Industries (CF), Google (GOOG), Baidu (BIDU), Wynn Resorts (WYNN), Salesforce.com (CRM), F5 Networks (FFIV), LinkedIn (LNKD), and Mastercard (MA), really allows a trader to become familiar with how a stock trades on a daily basis, and in turn, the ability to notice trends within a given security. I will often use the strategy as a starting point to dig a bit further into deciding whether a stock is oversold or overbought. This is not only for short-term trades, but also long-term, as well.
This upcoming Google earnings release has all the hallmarks of a trade that can turn into a disaster very fast if things do not go your way. This is often found out right after the market closes, when Google reports earnings after the bell on Thursday.
Ever since Google reported earnings last quarter, then announcing a stock split, this stock has not traded the same. It has been extremely range-bound. So much so that I have not even been able to place a trade on the stock that I felt would ensure a quick exit using my daily strategy. One simply has to look at such technical indicators as Bollinger Bands to notice this trend.
As usual, Google's stock option prices are expensive ahead of their earnings. In my opinion, I am not sure any type of spread trade (which I will always prefer over taking a one-sided directional trade for an earnings release) will even be able to profit.
Of course, Google many times has moved enormously after earnings. However, I am unwilling to assume that risk at this point. Last quarter, I placed a 'reverse iron condor' spread around Google's earnings. Looking back, I made the mistake of pushing the strike prices too far out of range, and just missed hitting a very profitable trade. This is the problem: it is really impossible to expect how much Google's stock will move this time around.
If you think that Google will move out of its current price range and veer in one direction in a month or so, then sure, you can push the expiration to August 2012. You will certainly pay up for that, however.
Currently, Google is trading at $576.73/share. The 52-week range is $480.60 - $670.25, so there is some price action there.
52wk high: 670.25
52wk low: 480.596
Div Rate: N/A
Market Cap: 188.03 B
Volume: 1.68 M
The issue is that most of that came a while ago, as this chart shows:
|Jul 17, 2012||578.43||580.67||568.40||576.73||1,674,828|
|Jul 16, 2012||576.37||579.19||571.78||574.92||1,462,861|
|Jul 13, 2012||572.15||579.15||568.55||576.52||1,976,558|
|Jul 12, 2012||567.12||571.93||562.09||570.48||2,310,094|
|Jul 11, 2012||576.30||577.85||564.94||571.19||3,500,946|
|Jul 10, 2012||590.19||592.43||578.74||581.70||1,923,015|
|Jul 9, 2012||584.95||588.60||581.25||586.01||1,715,020|
|Jul 6, 2012||592.45||593.52||582.82||585.98||2,162,328|
|Jul 5, 2012||588.76||600.06||588.54||595.92||2,345,901|
|Jul 3, 2012||580.01||588.41||578.00||587.83||1,190,525|
|Jul 2, 2012||581.82||583.00||576.50||580.47||1,655,563|
|Jun 29, 2012||574.96||580.13||572.20||580.07||2,522,562|
|Jun 28, 2012||565.90||566.23||557.21||564.31||1,922,064|
|Jun 27, 2012||567.70||573.99||566.02||569.30||1,692,446|
|Jun 26, 2012||562.76||566.60||559.48||564.68||1,351,151|
|Jun 25, 2012||567.33||568.09||557.35||560.70||1,582,036|
|Jun 22, 2012||568.00||571.48||565.82||571.48||2,229,125|
|Jun 21, 2012||579.84||579.84||563.73||565.21||2,011,322|
|Jun 20, 2012||579.81||580.00||573.51||577.51||2,346,698|
|Jun 19, 2012||573.59||584.28||573.12||581.53||2,076,629|
|Jun 18, 2012||562.62||574.21||559.25||570.85||2,497,864|
|Jun 15, 2012||560.34||564.52||557.09||564.51||3,002,511|
|Jun 14, 2012||561.30||565.07||556.52||559.05||2,345,107|
|Jun 13, 2012||561.72||567.00||558.68||561.09||1,954,607|
|Jun 12, 2012||569.77||570.30||558.58||565.10||3,224,142|
|Jun 11, 2012||584.21||585.32||566.69||568.50||2,662,269|
|Jun 8, 2012||575.85||581.00||574.58||580.45||1,410,366|
|Jun 7, 2012||587.60||587.89||577.25||578.23||1,759,532|
|Jun 6, 2012||576.48||581.97||573.61||580.57||2,096,173|
|Jun 5, 2012||575.45||578.13||566.47||570.41||2,340,477|
While past price movement is not always a precursor to what the future movement will do, it sends up an immediate red flag to avoid this trade, at least this time around.
As I mentioned earlier, Google's options are expensive right now. Even if you wanted to place a 'strangle' spread, which is buying both out-of-the-money call and put options at different strike prices at least one month out until expiration (this trade is similar to the 'straddle', which is buying at-the-money call and put options), the price movement needed to profit must be enormous.
If you decide to use the July expiration (with one day left after Google reports), you will be making a mistake you will not soon forget. The lack of time-value will shred any value you think might be there after Google reports, even if the stock does move a lot.
I am often asked why does a stock move so much, but the option prices do not reflect the change in share price? Quite simply: time-decay. This is always why, especially on 'strangles' or 'straddles', you must always give yourself plenty of time. I prefer at least one month out on these two types of trades.
In this article, I will also show a few trade examples using the 'reverse iron condor', with different strike prices, and why I will not place this trade.
Back to the 'strangle' and 'straddle' trades. Currently, a 'straddle' trade using August 2012 $575.00 strike prices will cost almost $4,350.00 to only have one contract on each "leg":
Greeks / NBBO
That is very expensive, in my opinion. If there is not a major price move, there will be a major loss incurred here. It is too risky.
On the other hand, we can look at the 'strangle' trade and see if it makes sense, using different strike prices with the same expiration. The benefit over this trade compared to the 'straddle' is that your investment/risk will be much smaller, but not without its risks, either:
Greeks / NBBO
So, the investment is about half that of the 'straddle', but this is still more than I am willing to pay in these conditions with the way Google has traded over the last few months.
It should also be noted that CEO Larry Page has been rumored to not be feeling well, as he has missed certain key dates and presentations as of late. This has me a bit cautious on the call option side of this trade, and since I only trade earnings releases neutrally, I do not want any part of it. Do I think Google is going to make a large enough move to offset the costs of the trade to turn profitable? No, not this quarter. This is a wait-and-see approach, to let everything with the stock split and other concerns work themselves out.
Now, let's say you wanted to use a weekly 'reverse iron condor' that expires this coming Friday, July 20, 2012. Normally, the 'reverse iron condor' is a safer bet that the 'straddle' or 'strangle' as an earnings trade, as it requires less of a price move to profit.
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)
I have been bouncing numbers off my trade calculator for days on end now and I just cannot seem to get any strike prices that work for me, in terms of return on investment and risk, but here are some examples why:
Example 1: Weekly July 20th expiration: (note: I will use ten contracts for each leg for explanation purposes):
- Buy (10) GOOG July 2012 $555.00 put options
- Sell (10) GOOG July 2012 $550.00 put options
- Buy (10) GOOG July 2012 $595.00 call options
- Sell (10) GOOG July 2012 $600.00 call options
Current Price: $576.73
|Price||Profit / Loss||ROI %|
While the above maximum return on investment is at 53.8%, it is important to look at the break-even points and what the stock must move in order for you to achieve this return. From its current level of $575.73/share, Google needs to move at around $25.00/share (either direction) in order for this to happen. Is it unreasonable? Not at all. Should it be expected? I am not so sure, and that is why I am staying away from this trade on Thursday.
The farther out strike prices you may choose to use will cost you less, but please be aware that you are definitely taking on a lot more risk. There are too many other great trading opportunities coming within the next couple of weeks for me to be interested in Google's on Thursday. While the stock may move substantially Thursday after the market closes, it is simply not a risk I am willing to take this quarter.
If you have any questions, you can leave a comment or send me an e-mail. Thanks again.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.