Google (GOOG) is scheduled to announce quarterly earnings next Thursday, October 18th, one day before the October options expire. Two weeks ago, I published "How To Play The Google Earnings Announcement (Vs. Apple) With Options." Since that time, the stock has fallen about $10, pausing a bit from its long run-up going into the announcement week.
In anticipation of the earnings announcement I have bought the November - October calendar spreads suggested in that article at strikes ranging from 710 to 785 (using calls for strikes over 755 and puts for strikes below 755). The spreads cost me an average of $6.50 ($650) each. On October 19, when the short options expire, the spread closest to the money should be worth about $15 and spreads at strikes within $5 of the stock price should be worth about $12.
That means I expect to double my money on at least 3 of the 15 spreads I own. I expect to make some money on any spread that is within $25 of the stock price at the close of business next Friday. I intend to close all the spreads on that day.
This is the risk profile graph which shows the expected gain on the $9800 I have invested in the 15 spreads:
The graph shows that my break-even range extends about $50 on the downside and $40 on the upside.
If I am lucky enough for the stock to remain unchanged at the close of the day next Friday, I could make as much as 140% on my investment or as much as 100% if it doesn't fluctuate by more than $20 in either direction.
A caveat: the software that created the above graph assumes that the November option will carry their current implied volatility (IV) number when the October options expire. This may not be the case. Current IV (about 31) could be a little elevated because of the earnings announcement [but surely not as elevated as the October options (IV = 51)]. IV for the December options is about 27. If IV falls, the projected gains will be less.
Strategy For After the Earnings Announcement: Once the earnings announcement is done and over with, it is common for the stock to take a breather for the next couple of months before it might make another big move in anticipation of the next announcement. Today I would like to discuss a possible options play for that two-month period after the announcement.
These positions will make an average of 20% at any price that Google might end up at on December 21 unless it has fallen by $50 a share. Anything less than a $50 drop, or a flat market, or any higher price whatsoever - all should result in approximately the same 20% gain.
Here is the risk profile graph for these positions when the December options expire:
Here are the option spreads that create the above graph:
These spreads will cost about $17,000 to place. Admittedly, they are a little complicated, but were necessary to create the nice level profit line that extended $50 on the downside and $100 or more on the upside. You could simplify them a bit by selecting only one of the December vertical spreads, the January vertical and two of the put calendar spreads, although the downside protection might fall to $45 from $50. Your investment would be reduced to about $9000 and the same 20% gain should accrue as long as the stock falls less than $45.
In the above positions, there are four vertical spreads, three in December (long a 640 call and short a 690 call, long a 650 call and short a 700 call, and long a 670 call and short a 720 call) and one in January (long a 660 call and short a 710 call). There are three January - December calendar spreads using puts, one each at the 685, 690, and 695 strikes.
These positions should be placed on Friday, October 19 or in the following week to avoid the possible big change in the stock price which might take place after the earnings announcement. If the stock is $10 higher on that date, all the strike prices on these spreads should be adjusted $10 higher, etc. so the $50 downside range is measured from the then-current price of the stock.
The most profitable price for these positions would be if the stock fell between $20 and $40 over the 60-day time period. In that area, the gain could approach 25%. Of course, there is the IV issue which is not so likely to be a factor here. In fact, with the January earnings announcement coming soon after the December expiration, the January options might well carry an elevated IV which would increase the projected gains.
In the event that the stock falls by $30 or $35 from where it started when you originally placed your spreads, you could expand the downside break-even point by another $10 by buying an additional calendar put spread at the 680 strike price. This trade would reduce your gains somewhat if the stock soars higher after this drop, however.
In order to lock in your 20% gain you would close out all the positions on December 21st when the December options expire.
For many years I have spent countless hours trying to create the perfect options strategy that makes a gain no matter what the underlying stock does. After all this often agonizing study and analysis I have decided without doubt that there is no such thing as a strategy that can never lose money no matter what happens to the underlying. The options market is just too efficient. However, I do believe that you can come close.
The option play described above should make a decent gain (20% in two months is over 100% a year annualized) if a good company like Google does anything except fall by $50 over a two-month period between earnings announcements, a typically quiet time for the stock. Although it is far from being a certainty, I like the odds.
Disclosure: I am long GOOG.