For those of you who doubted Google (GOOG, $536.40, up $86.86), shame on you. If you haven't heard by now, Google had its biggest ever one-day point gain and was up 20% Friday after blowing away Wall Street's estimates. The stage was set for a huge disappointment. If Google missed, there goes the Tech rally that started with Intel (INTC, $22.55, up $.0.44). If Google beat expectations, it would seem only natural that the stock would pop.
In a classic "if hindsight were 20/20" quote, somebody made a fortune going long the April 500 calls (GOPDO, $39.00, up $38.45) or the May 500 calls (GOPEO, $46.50, up $39.50). Although the April calls expired Friday, they represented nearly a 7000% return from Thursday's close of 55 cents. I only say that because I really thought about doing an option trade on Google right before expiration.
Now, realize this is the highest of high risk plays associated with options but sometimes the gamble is worth the risk. The reason being is that Google would announce on Thursday after the bell and Friday was expiration day. If you went long the stock and they missed, you would have lost your entire investment. If you had bought puts and Google did what it did, then you lost your entire investment.
However, there was a way to play this if you were unsure what would happen with Google's earnings. The problem was that I didn't factor in a higher or lower price move in the stock. A starting point for playing earnings announcements is factoring in an 5%-10% move in the stock. On Thursday before the market closed Google was at $450. Even figuring in a 10% move has the stock at $495 or $405. However, these targets would have been out-of-the-money based on the April 500 call and the April 400 puts (GOPPT, $0.00)
Like I said, the April calls were selling for 55 cents while the puts were selling for about $1.35. If I had bought equal contracts of each and the stock had failed to advance 10%, I would have lost both investments based on where my calculations were. That is where the risks were too great for me. I didn't think Google would make a 45-point move regardless. If I had taken those calculations a step higher to 12%-15%, there's no doubt I would have taken the trade. As it turns out, Google jumped 20%. Google is an amazing story, and an even more amazing stock.
Hit me up if you enjoyed the article or made any money!
Rick Rouse
