Phil Davis' Google Play -- Round Two Update

Includes: AABA, GOOG
by: Philip Davis

It usually doesn’t go this well... We came in right at the bottom, made so much money we took half off the table, and we cashed out on top -– this was very good timing indeed!

As I said in the 9/19 post: “...and not being greedy saved us a lot of pain. Let’s make very cautious entries here, especially as we move on to test $400 again. I’ve taken half off the table to guard against a pullback, and will take the rest off to reposition shortly.”

After taking half of our original play off the table, we set tight stops and got out on Monday. Tuesday morning, in comments, we called for puts at 10:11 and we got a nice volume sell-off at 11:35 due to poor guidance from rival Yahoo! Inc. (YHOO), which I took to be overdone (for Google).

There was much discussion, and Wolf made a bottom call at 12:13, Chris pointed out at 12:21 that the sell-off made a nice Fibonacci retracement, and I had a new set of plays posted for the new levels by 12:57 –- a great team effort!

In Wednesday’s comments at 1:17 I said: “YHOO and Google Inc. (NASDAQ:GOOG) moving down -- another chance to get Google plays for the brave! Tom, I agree with the $394 comment but I'm looking for bounce at $396.25 so I will take a few there... If I'm wrong, I'll know fast!” We filled on our new target at 3:15.

So far our calls have not given us the instant gratification of the originals, although the Thursday morning run-up to $408 would have been plenty for most, if not for the comparative performance of our previous set of calls.

We have a lot more fear of the downside here and are ready to stop out even on the call side if we have to, as I still have general concerns about the market this week. But with earnings coming up, these positions... (never use real money to buy stock because you might lose it – call your professional advisor before making any investment decisions - I’m just some guy who already sold at $407 on Thursday morning...)

That being disclaimed properly, lets see how our new picks are doing, obviously we got better entries because we waited, but let’s just go with the original numbers selected on Tuesday:

The Safe(ish) Play:

A) Buy the stock for $397 and sell the outrageously expensive Oct $400s for $17. This reduces your basis to $380. You can roll the calls if the stock trades down, or take advantage of dips to buy-out the caller and resell as it moves up (this is what the big boys are doing to you!).

a. If you rolled the last round to the Dec $370, your basis is $346 so relax and let it ride; you are already $11 ahead on the Dec $370 which you may want to make a $40 offer for.

Well we were a little cheap with the $40 number, but buying that caller out at $43 on the day’s dips would have saved a $6 gain against your position!
On the A) call, the stock is up to $403.78 (+$6.78) and the Oct $400s, although in the money, are up just one dollar as volatility declines. As I said, safe(ish) and dull!

Middle Play:

A) Assume they will have trouble breaking $420 and take the December $420s for $17.30 and sell the October $430s for $5.70. Again you can roll, or buy out on dips.

The Dec $420s are $20.20 (up 14%) and the Oct $430s are up just .50 (9%) at $6.20.

B) Take the December $420s for $17.30 and cover with the Oct $380 puts when they get back to $5.50 or less.

So we have the 14% gain on the Decembers while the Oct $380 puts came all the way down to $5.20, but let’s call it $5.50. They are now selling for $5.80 so we are winning on both ends! As we move into earnings we may hold our premiums fairly well, but we will monitor this closely for exit opportunities (although most people consider 14% in a year a good time to get out of a position, yet alone a week!).

C) Split the December $440s for $11.40 with the Dec $360 puts at $10.30. You have 3 months in which a $40 move either way will put you in the money...

a. In a play like this, if I go in the money early, I like to reduce my holdings so I have just the profits remaining so either way I win.

So far so-so on this one: The Dec $440s are up $1.60 at $13 while the Dec $360 puts are down $1.80 to $8.50. This is my bad for not picking lower entries as, even a day later the $440s were as low at $10.40 while the $360 puts were as low as $7.80 on Thursday.
This is a great example of the value of reading the comment section as the difference between the print article and our actual entry point was close to 10%. Of course, this is a long bet on a big earnings move, so hopefully, like our last round, we won’t be sweating the early wiggles!

I think Google is oversold atm, and with earnings coming up, anything can happen:

A) Take the October $430s for $5.30 and the Nov $450s for $5.50 with the hope of selling the Octobers ASAP to reduce my basis on the Octobers.

Ah, I love it when a plan comes together! The $430s are already at $6.20 (up 20%) while the Nov $450s are $6.40 (up 20%). Again, this is a lot of money for 3 days folks -– keep it in perspective!

B) Take a 1/10 (of what you are willing to risk) position on the $420s for $8.10. If that doesn’t work, by expiration, take a 2/10 position on the Novembers that are $30 out of the money, followed by a 4/10 position in the Januarys that are $30 out of the money at the close of November contracts. If the stock is still flat on 19th, be glad you still have your 30% and go home!

The $420s are $9.20 (up 13%), down $1.50 from Friday’s open. Using my trading rules, they should have been stopped out at 10.60 (up 30%) as it double topped at $11.30 since we bought it.

I wrote a nice article on stops recently, and I cannot emphasize enough how important they are for trades like this! Like I always say, I am not a day trader but I am not averse to taking profits during the day...

We’ll follow up again next week but let’s be careful out there as we move into earnings on the 19th! I do not endorse new positions at this point other than a spread on earnings, but we do have to wary of volatility being squeezed out along the $405 mark, so make sure you think about your risk-tolerance far before you are emotionally involved (and you know you get that way) in the position.

I said last week: “Let’s keep an eye on Yahoo but, more importantly, Time Warner Inc. (NYSE:TWX) and Microsoft Corp. (NASDAQ:MSFT), our other on-line rivals. A drop back to $399.50 is nothing more than a healthy 50% retracement of last week’s $37 run!”

Yet another Disclaimer: You should never make real money plays of any kind without consulting your broker as this is very dangerous. Past performance is in no way an indication of future performance and I fully intend to, but do not currently own any of these trades.