It always scares me when a stock does exactly what I said it will do because I end up getting overconfident and making a huge mistake.
Last week we talked about Google hitting $401 before it turned with $404 being the magic # above which all bets are off but below which we are probably looking at a repeat of the assaults on $200 and $300 where we had a 10+% retraction before moving up.
Everyone plays the pattern recognition game on Wall Street (and in life, it’s how our brains are wired, we get little pleasure center rewards for discovering patterns so we always seek them out) yet chaos theory dictates that it is a loser’s game. This is why “contrarians” can be so successful but that is a discussion for a less exciting morning.
So Google is hitting my target, it looks like it is pinning the overbought meter way into the red, $400 is a big psychological barrier, blah, blah, blah!
This stock is going to $3,500!! (see article on Google’s next Decade Predicted).
Anyone actually shorting this stock is exactly as clueless as the people who paid 400x earning for pets.com. In the short term, I firmly believe this stock will hit $360 before it turns up but I certainly wouldn’t say that it can’t ignore me completely and fly to $450 in some .comish sort of euphoria, likely based on revised earnings estimates (Needham just flip flopped from a hold in July ($300) to a buy on Oct 21st ($350) saving their flock from some embarrasing capital gains but at least had the courage to say they were wrong).
So what the heck kind of advice is this? you may ask. Ahh, I do have a plan. It’s a risky plan but it’s so crazy that it just might work.
Next earnings are February and anything can happen. In between this stock can run anywhere from $500 to $250 (it could happen). What is least likely to happen, however, is that this stock will remain the same for 4 months!
So I am going for the following:
Buy the March ’06 $450 call for $17
Sell the January ’06 $470 for $5
+
Buy the March ’06 $360 put for $14
wait before selling closer put (because I will be shocked if this really goes up without retracing.
My goal on this trade is that one of my positions, in the next 3 months before earnings doubles (a $40 move in either direction should do it) at that point I can take the money and hold a free position on the other side or perhaps cut both positions in half so that I have free puts and calls into earnings.
The risk is huge as Google can stay flat for 4 months and both positions could expire worthless but, of course I will be reevaluating that before I lose a combined 25%.
The net is that for $25 a 10% move in Google in either direction by January will net me a 30% profit. If I’m very lucky I might make money on both sides between now and then. If I am very unlucky I will be pulling the plug with a $12 loss.
4 months ago Google was at $317 so it is up about 30% since then. 4 months before that it was at $172.
I’m not even going to talk about what happens if Google makes a 30% move on my options but all I need is $25 and a dream!
