Wednesday, April 15, 2009

GOOG Iron Condor Spread

Google (GOOG) is reporting earnings after the bell Thursday and is always a fun one to play in the options market. I don't really have a directional bias on it either way but it is right at its 200 day ema so odds are it makes a move from here. Usually GOOG has a decent move on earnings with 4 of the last 5 quarters seeing at least a 9-10% move or more. At the same time the options tend to underprice the potential move so it is not a name I prefer to sell volatility on. Usually the play in this case might be a long straddle or something but I want to reduce the cost and increase my odds of success so I want to go long an iron condor.

This is a 4 legged trade using the April options in which you buy a call spread and buy a put spread.
Specifically I want to buy the 380/420 call spread and buy the 380/340 put spread.

You are paying a net debit as of right now of around $24 and since the strikes are 40 dollars apart thats the most the position can be worth at expiration on Friday. So a potential 66% return in one day is what you are looking for as a best case.

The max loss occurs at 380 at expiration where you can lose your initial $24. But the probability that GOOG stays at 380 or anywhere near there is slim to nil.

Breakevens on each side occur at 356 and 404.

If you think GOOG will not break thru that range then you can narrow the strikes you use and increase your profitability range.
One thing to note is that you want to initiate this trade when the stock is close to 380, or else adjust the middle strikes to the current stock price.


GS751 said...

Whats a plowage in GOOG volatility look like in a trade like this. I like this play..

Jason said...

The plowage doesn't matter as long as the stock moves 7-8%

Nick H said...

How did this trade turn out?

Jason said...

Not too well because GOOG did not make the needed move. The probability of this trade is usually very good but this time just simply didn't work. If you closed this at the open Friday it was a small loss.