This week the earnings season starts in earnest. One of the most interesting companies reporting is Google, mostly because expectations seem to be sky-high and our Expectations Model predicts that there is a good chance the stock will fall after the announcement is made Wednesday after the market closes.
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How to Play the Google Earnings Announcement This Week
I have written a Seeking Alpha article explaining how I would play Google this week:
In the article I suggest buying a diagonal call spread with the long side in August at the 925 strike and the short side in the Jul-13 series at the 920 strike. I placed this spread in my own account today for a debit of $3.60 (in addition to the $500 maintenance requirement per spread, the total cost is about $860 per spread).
This spread should make a gain if the stock goes up by less than $30 (my article explains why I don’t think it will go up at all) or if it falls by less than about $50 (I think this is a possibility but a remote one).
Another possible spread would be to use the same strikes but buy Jul4-13 weeklies instead of the August series. You could do this for a credit of about $.90 which would lower you total investment to about $420 per spread after commissions (the $500 maintenance requirement less the amount of the credit). This spread would make a gain no matter how far the stock might fall (even if it fell to zero) but would start losing money once it rose by about $20 (again, an unlikely event in my opinion).
Another interesting spread would be to pick the strike price (or maybe more than one) where you think the stock might end up on Friday, and buy a Jul4-13 – Jul-13 calendar spread at that strike. It should cost you only about $200 per spread. You can’t lose more than that amount on the trade, and if the stock does end up very near the strike you picked, the spread might be worth $1000 or so. The entire $200 should not really be at risk because your Jul4-13 call should always be worth more than the Jul-13 call, although if the stock ends up at a big distance away from the strike you picked, it might be difficult to get the entire $200 back.
Please read the entire Seeking Alpha article to get my full thoughts on the diagonal spread play and why I expect the stock will trade lower after the announcement.
Good luck if you do something this week in Google!
Tags: Calendar Spreads, Calls, Credit Spreads, diagonal spreads, Earnings Announcement, Earnings Option Strategy, Earnings Play, GOOG, Google, implied volatility, Monthly Options, Portfolio, Profit, profits, Puts, Risk, Stocks vs. Stock Options, Terry's Tips, thinkorswim, Weekly Options