Google (GOOG) is finding it more and more difficult to walk the fine line between making money without doing evil versus otherwise. At every turn it seems Google is getting tangled up in some kind of controversy, from antitrust issues with the U.S. Federal Trade Commission and illegal Canadian drug advertising with the U.S. Food and Drug Administration to censorship issues with the Chinese government and a derogatory anti-Muslim video clip on YouTube. Even after all of the controversy surrounding the video clip and a request for removal by the White House, Google declined to remove the anti-Muslim clip from YouTube. However, Google is restricting access to the video clip in certain countries. Google is finding out very fast that free speech is not as appreciated in other countries as it is in the U.S.
It seems at every turn, Google is finding out the world is not simply black and white, but has a lot of grey areas, which the company seems adept at stumbling into. Google's dancing in the grey has cost it friendships, such as with Apple (AAPL), which quickly turned antagonistic after Google stepped on its toes. And, at times the company appears to be paying a high price for its dalliances in the grey area, for example with its purchase of Motorola Mobility and the corresponding patent trove that came with the purchase which Google noted would "help protect the Android ecosystem." However, by purchasing Motorola Mobility, Google combined a very high profit Internet business with a very low profit margin hardware company. But, so far the company's stock price has not reflected the watering down of its profit margin as shown below:
Google's stock price is up significantly for the year, even though it was stuck in a trading range between $575 and $650 for a good portion of the year.
In a previous article related to Google, a married put position and a protected covered call position were considered for Google, as a way to protect a profit yet remain positioned to profit from an increase in stock price. The Google protected covered call position currently has a profit of 2.3% and the Google married put position currently has a profit of 9.2%. Since a significant portion of the potential profit for the protected covered call has been realized, the protected covered call may be rolled. Additionally, an investor new to Google and seeking to protect a profit can enter a protected covered call for the company as well.
Using PowerOptions, a variety of potential protected covered call positions are available for Google as shown below:
The top position looks attractive with a potential return of 2.7% (32% annualized) and a maximum potential loss of 7.9%. Even if the price of Google plummets to the basement, the maximum loss which can be sustained is 7.9%. The specific call option to sell is the 2012 Oct 725 at $24.90 and the put option to purchase is the 2012 Oct 650 at $3.20.
Google Protected Covered Call Trade
- GOOG stock (existing or purchased)
- Sell GOOG 2012 Oct 725 Call at $24.90
- Buy GOOG 2012 Oct 640 Put at $3.20
A profit/loss graph for one contract of the Google protected covered call is shown below:
For a stock price at option expiration below the $650 put option strike price, the value of the protected covered call remains unchanged. If the price of the stock increases to around $800, the position can most likely be rolled in order to realize additional potential return.
Look forward to hearing your comments below!