Wednesday, October 13, 2010

Google (GOOG) - Earnings Trade; Pick a Strike

GOOG is trading $545.90, up 0.8% with IV30™ down 2.2%. The LIVEVOL™ Pro Summary is below.


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GOOG reports earnings tomorrow AMC, so let's take a look at this devilishly tantalizing trading opportunity - which can also rip your face off.

Let's start with some Earnings results history with respect to one day straddles. I have included the stats for the last eight quarters (below).

What We're Lookin' At:
The result of a simple trade: Sell the ATM straddle the day before earnings, and buy it back the day after. The last two earnings cycles GOOG has smashed short straddle holders if they were ATM. Before that, 6/6 quarters were winners to the front spread. Hmm...

Let's look at stock price movement as well. I have included the one day stock price movements (below).

We can see that it's a mixed bag, 4 days up, 4 days down. But... there is one pattern... Do you see it?...

$0.39, $0.14, $0.01, $0.15, $0.25... What are those numbers?... That's the distance the stock price closed from a strike price. Yup, GOOG tends to pin when earnings are on expo. That phenomenon makes it a very interesting trade. Just guess the right strike, and you're a huge winner.

Let's look to the Options tab (below).

Possible Trades to Analyze
For all you naked straddle buyers or sellers, I commend your risk tolerance... Go away... lol... I want to pick a strike and do a butterfly. Here are some examples:

1. Slightly Bearish: $540
Buy 1 Oct 530 put for $5.10
Sell 2 Oct 540 puts @ $8.70
Buy 1 Oct 550 put for $13.60
Pay $1.30 to try to win $8.70, or 6.69:1 MaxGain:MaxLoss payout.

2. Slightly Bullish: $550
Do the 540/550/560 butterfly in the calls. Pay $1.50 to win $8.50 or a 5.67:1 MaxGain:MaxLoss. Note the worse payout for a bullish outcome.

3. More Bullish: $560
Do the 550/560/570 butterfly.
Pay $1.50, 5.67:1

4. More Bearish: $530
Do the 520/530/540 butterfly.
Pay $1.40, 6.14:1

You get the idea... Of course stock can move WAY outside those ranges, and the further out you go, the better the payout if you're right. Also keep in mind, you can do $20 wide butterflies which give larger profit zones, but lower MaxGain:MaxLoss payouts.

This is a spec play, naked options (long or short) is very risky. Another note on the risk. If this thing pins again, DO NOT assume the options will work their way out if it's your short strike. Close for the small premium at the close, do not be naked short options and "hope" people do (or don't) exercise, this is a $600 stock. Each 100 shares is $60,000.

Final note. GOOG has a tendency to move on the day before earnings as well. If you're a gambler and like a butterfly, you can wait until near the close of tomorrow, to put on the trade.

This is trade analysis, not a recommendation.

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  1. Miles Hoffman...trial userOctober 13, 2010 at 12:05 PM

    Cool idea. I also like the day before/day after table but I wish you had an option :-) in Livevol on the Earnings tab that could choose the DAY of the ATM Straddle ("SD").

    For example, GOOG SEEMS to exhibit a bullish pattern into earnings, so the earnings tab default (starting 5-6 days before earnings)means the ATM SD is typically an ITM SD on the day of the earnings announcement. I'd love to be able to choose which day to calc the ATM SD (especially since it's comon for investors to play the earnings announcement with a short SD - or strangle or condor or...).

  2. hi im new at options ,but i read cramers book and he said to buy deep in the money call options if you think it going up ,im looking at the nov 460S what do you think???

  3. I'm sorry, but I can't really answer that question for you. Gets a little too close to advice.

  4. If I wanted to play one of your butterflies, I'd want to "guess" a direction and then pick the "strike to pin". However, I'd go wider than your recommmendation because to "guess" the magnitude of the move, option specialists talk about the ATM SD "expectation" of the stock price move. With GOOG at ~$545, it is "straddling" the 540/550 strikes, so an ATM SD is priced about $23 BUT IT IS ALSO OTM by about $5. Would the "expected move" then be $23+5 = $28, so I'd likely choose the $520 or $570 strike ($545+-28)? And why did your butterfly choices not consider this "expected move" calculation?

  5. I'm not sure options markets "expect" anything. They really reflect the risk appetite of the market makers. +-28 you refer to is just one standard deviation, it is NOT an expectation. If you use a probability measure, like normal or log normal, you can see what the "likelihood" is that the price stays within one sd.

    If you look at the average of the 540 and 550 straddles, I think you will find the "move" you're looking for from the $545 starting point.

    Also, I'm not recommending anything, just to be clear. Thanks for your comments.

  6. stelios, if you're new to options, I hope cramer explained WHY you would use DEEP ITM calls. If not, I'd tell you to buy Jeff Augen's book "Trading Options at Expiration" to learn about volatility collapse (~"vega", the greek that "newbies" usually don't understand). After earnings announcements, option prices experience a similar "volatility collapse" (especially OTM options).

    If cramer explained "vega", he used DEEP ITM options BECAUSE they will NOT experience this collapse (since they're so deep in the money). However, the call you mentioned has a delta of 94 and are priced at $84, so barring an "absolute collapse" in the price of GOOG (>15%), your use of options is not much different than just buying the stock outright, except your using leverage (note: the average post-earnings move in Ophir's table is JUST 4.9%, so a 15% move would be large).

    BTW: If you can correctly pick the direction a stock will move after earnings, how much will you charge me to manage my money! (If you can't correctly pick the direction, then you're just gambling!)

    And like Ophir, I'm not recommending anything, just trying to educate you. Since you're a "newbie" and using options, the inference is that you're using leverage. And if you are a newbie using options for leverage, the REAL INFERENCE is you can't afford to be gambling! :-) ... so I hope you can truly pick the right direction!

  7. Ophir,

    I wonder how straddles are selected for Earnings and Divis menu in LVP. Seems all be (randomly?) out of the money compared to EOD price of stock before earnings event (looking at google, for example for 7/15 the pop-up menu shows 460 straddle price and EOD was 490. Won big, of course, next day:)). Also, just wondering - is there any way to prefer butterflies over time spreads and visa verse or both just guessing on where google will pin?

  8. The straddles in LVP are the ATM as of five trsding days before earnings. If the stock moves during that period, that straddle may not be ATM anymore. We will allow to view day before data shortly.

    Doing a trade on earnings one day before expo. really is just a guess. It's a gamma play, one way or the other. I wouldn't spend too much time on this one really. Just watch it - not a good play in my opinion.

  9. Thank you for the article. There are a few additional examples to play google earnings...

    You may want to check those out

    Profitable Trading, OP

  10. Looks like 4/15 event but in opposite direction :)

  11. I notice you are looking at stock price close to close across earnings, but what about close to open, since that gap can be much greater than close to close? Since we could trade out of a position the morning following earnings I think that might be useful.

  12. very true. I'll take that into account in future posts, thanks.