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Managing Risk: Switching From GOOG (+82%) To BIDU (+157%)

|Includes: BIDU, Alphabet Inc. (GOOG)

Last week, GOOG's superb earnings, which beat the estimates, drew a lot of attention, more so "ahead" of the report than "after" the report.  Ahead of the repot, GOOG shares climbed from below $370 to above $390 in 2 days!  The buying volume jumped and it was very convincing that GOOG was going to delivered a solid quarter:

GOOG (3-month daily chart)
As you can see here, just ahead of the report,
1) GOOG jumped above $380 (a resistance that GOOG had not broken through for the past 6 months!)
2) and the buying volume was very high!

I got into the GOOG 380 calls for $9.9 on Wednesday as the GOOG started to move higher towards $380 and the volume started to jump.  I cashed these 380 calls out at $18 for a +82% gain on Thursday, ahead of the report, and, switched my play on GOOG earnings to BIDU April 200 calls.

On Thursday, after the report, GOOG initially jumped above $410, but soon came back down to $390 again.  In my article on Thursday night, I wrote:

"I don't necessarily trust the after-hours reaction to GOOG's earnings, although I did cashed out my GOOG 380 calls for an +8[2]% gain.  I did not want to wait for GOOG earnings.  The "non-reaction" this afternoon may just give us a chance to get in tomorrow.  Since GOOG did not jump higher after the market, out-of-money and near-the-money options will probably lose value at the open tomorrow morning..."

On Friday, GOOG opened at $386.02 and quickly shot up to almost $400, but, closed at $392.24!  April call options above $400 all expired worthless.  $390 calls closed just above $2, down from $10+ after Thursday's close.  This was the reason why I cashed out my April 380 calls "before" GOOG's earnings report:

GOOG shares were driven up so much ahead of the report, there were so much premiums built into the April GOOG "near-the-money" and "out-of-money" calls.  Those $380 calls were trading around $18-$19 when the stock was just getting close to $390, a $10 premium!  With that much profit, it was not prudent to risk that much profit.

On the other hand, BIDU's call options were much more reasonable; and, if GOOG reports well, it was very likely that BIDU stock would jump also.  BIDU was trading around $198 when I picked up the April $200 calls at $3.7.  Then, I added more at $5, tripling my position.  Later that afternoon, I was able to lock in some profits at $6 and $7.1:

The switch from playing GOOG options to BIDU options greatly increased my reward/risk ratio.  Instead of risking $18 per contract, I was only risking $7 per contract.  In addition, by cashing out on GOOG calls and locking in partial profits on BIDU calls, I was only risking on "house money"!  Essentiallly, my risk was "zero"!!  I had no risk and a good potential for a "bigger" gain!

On Friday, BIDU jumped even more than GOOG.  BIDU added $6.64 and closed at $210.09, up +3.26%.  I cashed the rest of my BIDU April 200 call at $9.5, an averaged profit of +108%, and as high as $157%.

There are several lessons here:
1) When you have a lot of profits in a position, don't be shy to cash it in!  Sometimes, being too greedy can turn your profits into losses.  (This is especially true for options players.)

2) If you're very confident about your position, at least take "partial" profits!  This helps to increase your reward/risk ratio.

3) In the options expiration week, especially on the last day, there can be big movements due to "expiration manuevers".  A lot of times, the premiums built up in options can be easily wiped down out.

4) Sometimes, you don't have to directly play a stock when you want to play its earnings.  You can also look to play other stocks in the same sector or same business.

5) When playing earnings or an expected event, price movements and volumes can tell you a lot about what the outcome is going to be.

6) It's prudent to manage your risk.  Hardly anything is "for certain" on the stock market, especially in this volatile environment.  No matter how "sure" things may seem, something else could change.  For instance, we were all pretty certain that GOOG was going to beat the estimates, but, the stock did not get an "immediate" jump as some people might have hoped (although this could be a result of options expiration manuevers; we shall wait and see what happens next week).

Hope you're enjoying your weekend!  NBA playoff time!!  I'll be back tomorrow evening with my week Market Forecast.

Good night and HappyTrading! ™

GOOG none; BIDU none.