The hype and expectations for a big move continue to be priced in, and when they deliver or miss big the option prices are reflecting it.
This past week Google hit one out of the park and was rewarded in a nice way – a nearly 7% rise (ironically, Google traditionally moves about 7% after earnings).
A great gain if you hold the stock, but how many of you hold say, 100 shares of Google? Probably not many. I didn’t play it this time around, nor did I this past July.
Could I have made a good return on options even if for one day? Yes, a decent return but relative to risk it wasn’t worth the effort. In fact, the 555 calls doubled (for a little while).
But would you want to be naked on the upside or even want to buy a little protection ‘just in case’? I’m always erring on the side of conservatism when it’s not lining up exactly how I like it.
I read about some who ‘claimed’ to have made the trade on Google before earnings. With options, it was nearly impossible to get paid for the risk you were taking…period.
We know there are times when you ‘have’ to throw caution into the wind. I get that, and defining your risk is the way to go but when looking for the jackpot on trades like GOOG, ISRG, PCLN, CMG even AMZN you want to come in ‘under the radar’ – before anyone has a chance to get caught looking the wrong way.
In 2010 it seemed like avoidance rather than a crowd (more on that below).
Let’s take a look at implied volatility, which is normally rather calm (historical vol is under 30). The options expiring next week were more than double that level – hence you needed to pay up to play.
But, it’s earnings right? Should be a premium on the move. This is true, however my best plays are not when the market ‘knows’ the move will happen.
You don’t get many chances to hit big on these kinds of names, and when I have a chance I choose to make it count. So, on Wed the stock was around 548.
The weekly options were just opened on strikes from 550-585, and man were they pricey! The 585′s were about 7 bucks, so I would need a move to 592 just to break even, or an 8% move.
Not a smart bet. And there is the risk of failure – if the stock moves far less the premium is destroyed, no chance for anything re-captured.
Now, I have had some of my greatest triumphs trading Google options. But I want the risk/reward tipped in my favor before I venture out.
In 2010, one such opportunity occurred, I mentioned it to a few friends and posted it on the Realmoney.com Columnist Conversation four days prior to closing out a trade that hit 1000% post earnings.
I heard from many readers on that site who followed along with me and made a bundle. That trade was NOT there this past week. Of course, a different market environment, too. History repeats over and over, which is why technical analysis is so crucial.