Trade Process: Adjusting Google Trade Ahead Of Earnings

Some of you may remember that I put on a Google (GOOG), July/August 930 Call Calendar, selling the July 930 Call and buying the August 930 Call from the post I wrote on June 19th, I Finally Bought Google Today. Too many it seemed like exactly the wrong time and looking at the chart there is a big Shooting Star that day foreboding a reversal, which did play out. So it was not a good entry. But hey, I was in it and had to deal with that. With a Call Calendar the upside and downside in the short run are both buffered. Now that earnings are approaching after the bell Thursday it is decision time. Do I keep it or sell it off. I did not publish the price I bought for since I did not trade it in the stream but I paid $6. It is worth about that now, So I could get most or all of my money back by selling and just avoid earnings altogether. The way I see it there are three possible ways this plays out through earnings.

1. The stock rises a lot. This is very possible as it typically moves about 4.5-5% and the options are pricing in a similar move. In this case it appears that the Call Calendar will be capped at the time value in the extra one month of the August Call. This seems to be running about $6 from a look at the deep in the money options. No real risk to the upside, but no real gain either.

2. The stock hangs out around 920-930. This is a real possibility despite the options pricing and the historical move, with the largest Open Interest (OI) near the money at the July 920 Put and on the Call side the 930 Call. There are bigger OI’s in the 950 Call and the 880 Put, so this is by no means certain. If it does not move much then the July Calls may expire worthless, giving me a windfall on the August Calls, or I may be able to buy the July Calls back at a very cheap price. There is little risk in this scenario and somewhat greater upside than the first scenario.

3. The stock falls precipitously. In this scenario the July Calls expire worthless and based on the options chains today it would need to fall below 860 before the August Calls could no longer be sold to recoup the premium paid. That seems a pretty safe bet. This scenario also would leave the possibility that Google could rise after the July expiry and the August calls could be sold for a profit. Barring a unforeseen revelation it seems likely that Google would at least start to recover from a pullback over the next few weeks. This scenario carries the most downside risk, but mainly $60 lower and has potential for a profit as well.

Based on my assessment The risk of holding through earnings seems small. I could move the calendar higher, say to 950 that highest OI Call Strike, to avoid the cap in scenario 1, but that raises the break even level on scenario 3 to 880, much closer. Conversely if I were to lower it below 900 it would cost additional premium to do so and increase the chance that the trade gets capped. I will likely do nothing to adjust this trade ahead of earnings.

I will be reviewing all of the options action and the chart for a potential new trade ahead of earnings tomorrow though.

Disclaimer: The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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