I received several e-mails and tweets Tuesday asking if I was once again playing the mighty Google into earnings, and if so what was my preferred play. It’s a delicate situation with options, the stock generally moves 6-7% post earnings and with option prices relatively cheap (we’ll talk about that a bit later) then it seemed worth a shot to get paid.
I’ve made some good money playing Google into earnings in the past. However, I’m particular on this name simply because it gets too much love or hate at these moments, and I prefer to be on a position when most have no idea what the reaction will be. It seemed a bit too hard to take a side or even go both ways (strangle or straddle), the option prices were juiced up. And there you have the main reason – market options are cheap with the VIX at 12% BUT Google options were not.
The market was pricing in a post earnings move of about 6% and that is what it looks like we got. The pricing comes from adding the at the money straddle, in this case the 705 call and put and you come up with about $36. Looking deeper at the plays if we see the Feb 730 calls and 670 put (a strangle) we would have paid $20, and needed a 5% move just to get to our strikes! The volatility will come out quickly on both sides this am; the premium was crushed in half even with this huge move Wednesday! To be fair, this Feb combo has 3 1/2 weeks and will hold some decay but who wants to pay up that much and then have to pray for a big move?
A BETTER OPTION
My preferred play is when the market is not pricing in a substantial move – an outlier. Take a look at an extreme move, with Google moving 60 bucks, or 7.5% (a move it has done in the past). The 760 call closed at 3.2 while the 640 put closed at 4, those will be hammered – and the stock is up 5%. The reward/risk profile just wasn’t there for my preference. That’s okay! The point here is there was very little edge to play this name into earnings this time around so it was a pass. Doesn’t mean it won’t be interesting later today or down the road.
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Brian Lund on trading earnings announcements.
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