It was a very hectic couple of days so I’m doing a special update to keep us all on the same page on these Google plays and to discuss strategies so we can see what worked well and what didn’t.
Setting stops and controlling greed was key here and "Always sell into the initial excitement" is a rule that you may as well just etch onto your monitor – as Friday’s action makes painfully clear.
Safe(ish):
Sorry but when I wrote these up Thursday I did not adjust entries on B and C.
A) Buy the stock for $466 and sell the outrageously expensive May $470s for $16.35. This reduces your basis to $450. 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!).
- This is a very tedious way to make money but will likely net a 4% profit in 30 days on pretty much as much money as you would have wanted to commit. While not totally safe, you could always sell the next level down for another $10 so, outside of a plunge, you don’t get hurt too badly. For example, the stock is at $482 now and you can sell the $480s for $15.20 while the $500s are $6.55 so you can pick up about $4.50 for every $10 the stock drops. Since you started with $16.35 it would have taken a $30 drop below your position ($466) before you took any real damage. As it ties up a lot of money, I would just stop out even on this one.
B) Play for the comeback of volatility ($40) by taking a spread of the May $510s for $2.30 and the May $410 puts for $2.18. Either one should be at least $8 if we get a $40 move within 30 days. If we get a fizzle, they should be 50% recoverable and we can also flip and sell Apr calls against them (risky but fun).
- This trade did not go off for me because the May $510s shot up to $4.75 on Monday’s open. I took them, made 23% and killed the trade on Thursday as I decided the math no longer worked as I expected to have problems at $500 (remember my target was $490 with a possible spike to $510 so we are already disappointed so far) and these were not moving well on a $15 up move in Google. Another great reason to enter trades slowly is to get to know what a stock price move does to your contract prices before committing.
- The $510s opened at $7.50, not bad, and the $410s dropped to .45 but were never more than $1.80 for the week so selling into the open was the way to go for a $7.50 return on a $6.55 investment. If you still have the $510s (and I do from another trade) you might want to spend $2.40 to bracket them into the $500s. The $470 puts are the best downside play at the moment with $2.50 down and $3.80 up on the next brackets.
C) Make a tighter collar of the May $480s for $11.85 and the May $450 puts for $9.70. With absolutely no movement, the Apr $480s are $5.15 and the Apr $450 puts are $4.50 so this is probably your worst-case scenario post earnings bearing in mind a $14 move would be 1/2 the lowest move of any earnings month on our above chart.
- The $480s came in at $14 and the $450 puts only cost us $7 so this balanced but we did shift to more puts than calls on Thursday, which helped a lot. This play died a quick death as we got our $2.50 for the puts at the open (down $4.50) per morning instructions and the $480s quickly fell from $22.60 (up $10.75) to $19.50 (up $7.50). Even if you took a full position on both sides of this, $3 on $21 in a week is nothing to sneeze at, remember these were the safe plays!
Middle Play:
A) Assume they will have trouble breaking $500 and take the Sept $510s for $21.50 and sell the May $510s for $6. Again you can roll, or buy out on dips – Sept $540s are $10.85 so you lose $3 per $10 and you have July earnings in between to keep volatility up.
- This is a full spread play, up $5 so far and the $510s took a much bigger percentage hit than the $500s so it was the right call (they both went down about $2) but we do need to consider selling down if we don’t get any movement. On the upside, we have 3 months to roll but we still need to get out of the sold calls if this thing really takes off.
B) Take the Sept $520s for $18.50 and cover with the May $440 puts for $4.50. Sept $500s are $23.20 so a $20 move does it for you, leaving you with a very nice income producer for 4 months.
- Also triggered Wednesday and this is the joy of taking a risk. We stand ready to sell some May calls on the peak but no hurry here and, rather than selling the May puts, I will consider selling other puts against them as momentum plays. Now $20.85 and $1.40 we MUST sell Mays or this trade becomes dangerous so keep that in mind. The $520s peaked at $25 but that wasn’t why we took this one.
C) Split the June $500s for $11.50 with the June $440 puts at $7.50. You have 3 months in which a $40 move either way will put you in the money…
- These were reduced from 20 and 10 to 10 and 10 as we got a ridiculous $17 at the open on the $500s (when someone offers you 50% in one week – TAKE IT!). That leaves me in for $13 on the remaining spread, now $15.90 (I would have been better off getting all out so far). This is effectively a new gamble but the $440s are not good support so we’ll have to watch these carefully.
Riskier:
A) Take the Apr $500s for $1.75 and the May $510s for $4.50 with the hope of selling the Aprils ASAP to reduce my basis on the Mays.
- This was fun as the April $500s were nice and bouncy, giving us gainers Monday and Wednesday which I applied to the basis, reducing the basis to $3 on the two sales. I was greedy here and didn’t sell at the open but got half out at $5.75 leaving me in for a quarter on the $510s but we’re already down to $4.25 so I need to set a stop at $3 to preserve half my profits.
- Note that this was handled differently from Safe-B because my goal here was to take a chance into earnings, not to make 20%. In the end though it would have been smart to take the full exit on Wednesday with a 90% profit and no risk. Had I not had other balancing plays, I would, of course have gotten out then.
B) Take a 1/10 (of what you are willing to risk) position on the Apr $500s for $1.75. If that doesn’t work, by expiration, take a 2/10 position on the Mays that are $30 out of the money, followed by a 4/10 position in the Junes that are $30 out of the money at the close of May contracts. If the stock is still flat on June 15th, be glad you still have your 30% left and go get drunk!
- This is absolutely a sell into the initial excitement play. Following our regular entry strategy we already had a near double at $3 on Thursday ($2.70 on Weds too) and a nice reentry at $1.50 yesterday for a free ride into earnings. Either way, don’t be greedy – take at least half off while people are acting silly, you’ll be amazed how fast these premiums can deteriorate on you.
That was my comment on Thursday and boy did these deteriorate fast! Next time we sell these babies as I couldn’t believe how fast the value collapsed! They opened at .45 and fell to .15 the second Google turned. Next time we just wait on these as momentum plays, there is no sense doing this with just a day left!
Extra Plays:
A) At least I learned my lesson as I was so shocked at how fast these went down that I called for putting 20% of our profits into the $490 puts as they collapsed at the open as well. The April $490 puts went from $22.50 at Thursday’s close (GOOG at $470) to $2.50 at the open and as low as $1.25 before finishing at $6.95. Following the normal day trading strategy of buy, DD, sell half, set stops, buy again (if you get back to your original price) with tight stops would have let you retire if you had followed it here as this position went from $2.50 (open) to $4 (10 mins late) to $1.25 (spike at 10:45), back to $2.50 (11:15) to $6 (12) to $2.50 (1:30 to 3) and back to $6 at 3:30 but peaking around $8 on that spike.
This is a great example of how important it is not to chase and how silly option pricing can be. At 1:30 to 3pm this was almost a no-brainer as it had zero premium all the way down into the close. This was a great way to buffer open May calls while we decided what to keep, the fact that it paid a jackpot was a bonus.
My two Thursday add-on plays did quite well. Like TSO the best way for me to learn a position is to play it for a while and by Thursday I was getting the hang of these Google options:
B) We sold the Apr $470s for $12 in the $10KP and bought the May $480s for $14 assuming the $2 spread would hold up and the May $480s finished at $15.80 while the $470s held $12.35. Luckily, we saw this coming and killed the $470s at $13 in the afternoon and flipped to sell the May $490s for $13.50 (now $10.10). This gives us a $3.20 net on 5 contracts, which is a huge gain for the STP on just $1,000 initially invested.
I mentioned earlier in the afternoon that people who would not flip the caller should get out even and we were lucky enough to get that opportunity as well. We are now in this position for $3 and of Google finishes below $473 we lose money. At $476.20 we make the $3.20 we have now and the most we can make is $7 over $480 so if we are offered $5-6 we should take it and get out! Really in the $10KP we should set a stop at a $2 ($1,000) gain anyway.
C) Something was bothering me as I looked over my trades, especially as Google was kind of range bound for the week and it occurred to me that it would be terrible for us if it did nothing on Friday. My solution was to sell the April $490s for $4.50 and also sell the $460 puts for $5.90. I felt pretty confident that the $11.10 collected would bail us out on either end since we were covered all the way down to $448.90 and up to $501.10 and, in either case, we would have made a fortune on our other plays at those numbers.
This turned out to be our biggest winner as they both expired worthless and we’ll have to consider something similar for a CME play on Tuesday. Had I started with that premise, we could have afforded to take a lot more positions, as the money collected here would have subsided our other spreads.
