I don’t know about you but I don’t have a clue which way GOOG will move after earnings. I do have some historical facts that may or may not help. Never has GOOG missed two earnings in a row. Less pay per clicks have been registered this quarter and China growth is all but gone. I still have clients that want to be in GOOG but do not like to take the risk associated with owning a “high flier”, volatile stock. Here is how I played the position
I bought the stock @ $633.90 a share yesterday. Where you own a volatile stock like GOOG it could easily loss $100 a share before the market even opens tomorrow. I have a lot of risk on 1000 shares of stock so I look to find a way to lower the risk.
I bought to open a May 12 $635 long put for $26.50.
Stock 633.90 + 26.50 long put price = $660.40 total cost basis BUT
I have the right to sell GOOG at $635
NEW risk is 660.40 – 635 = $25.40 per share.
That sure beats hundreds of dollars and I now have a defined risk in my trade. $25.40 / 660.40 = 3.8% of my total invested capital. I love less than 4% risk in my trade of 660K !!!
I am also trying to control greed so why not lower my risk even more??? If I sold GOOG @ 675 I would make some good returns on a stock bought at almost 634. I sold a short call for $10.50 that would cap my profits yet lower my risk even more.
New Risk of $25.40 – 10.50 = $14.90 is the most I could lose on this trade out to the third Friday of May 2012. 14.90 – 650 total cost basis = 2.3% overall risk in the trade. My clients and I can liv
e with that and this is the way money managers should be looking at your trades.
What is the most I can make? Well by selling the short call and capping if GOOG goes over 675 by that third Friday in May I have to sell at %675.
$675 – Cost of stock $633.90 – $25.40 for the putt + $10.50 short call = $26.20 profit or a 4% return in 9 weeks and there are things I can do to adjust the trade if the stocks moves up. In a modest best guess it will turn into a 10% return or over $50 per share if GOOG trades over $700 in May !!!
GIVE ME A CALL TODAY !!! 888-287-1030