Saturday, November 19, 2011

GOOG Option Trade Review

One of my favorite trade setups for stocks during options expiration week is the "pinning trade" that shows up late in the week or the day of expiration. Long story short, I look at a stocks open interest and if there is considerable OI present at one strike versus all others then I like to then look at the short term trend and momentum of the stock to see if it likely that a move towards that high open interest strike price unfolds. This logic of pinning and why it happens is a whole post for another day but here I just wanted to do a trade review of my put spread trade in GOOG from Friday that I tweeted out live.

GOOG traded between 601-604 in the first hour of the day and I already saw that the 600 strike had the most open interest out of any strikes. It also is a good round number that traders monitor. So while I watched the market chop around slightly higher and tech kind of weaker overall on the day I kept my eye on GOOG and if it traded with any intention of going towards 600. The plan was to buy the slightly in the money 605 puts and look for a move to 600 AND THEN short the 600 puts to be in a vertical spread and expect the stock to pin at 600. Even if the stock tanks below 600 I still make the spread. My max risk on the trade was basically above the high of the day which would have risked about 1.00 on the spread.

Thought Process:

  • Watching the 5 minute chart on the left I took alert when the TTM trend bars closed 2 red candles in a row. At this point I see the stock decisively below the VWAP (red dashed line) and a fresh TTM squeeze setting up as shown at the bottom of chart. I want to buy the 605 puts on a pop back to the VWAP expecting the stock to roll over to new lows.
  • As the arrow shows I scaled into the 605 puts where I marked the blue vertical line. I added to the position a few minutes later as the VWAP held as intraday resistance. 
  • My mental stop was the highs and if GOOG broke down under 600 as planned I would put in a hard stop at breakeven to ensure no risk on the trade.
  • Within 20 minutes GOOG tested the 600 level and I shorted the 600 puts to create a vertical put spread at an average price of 2.25.
  • The TTM squeeze fired off a short signal and GOOG fell all the way to about 594. In hindsight, it would have been nice to simply be long the 605 puts with no spread but I cant trade in hindsight.
  • The max my 605/600 put spread could be worth would be 5.00 since that is the difference in the strikes. That max wouldn't be reached til near the close when the premium evaporated so I was very happy with simply selling for 4.75 if I could instead of being greedy for the last few dimes.
  • By the next hour I was filled for 4.75 on the put spreads after an entry of 2.25. A gain of about 111% or +2.50 per contract.
  • A huge winner for a relatively small move in the stock, percentage-wise. That is the best part about using options and spreads during options expiration when you know the likely strikes that are in play for pins.

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