July 3, 2009 - GOOG Put Spread

Yesterday I saw a trade I wanted to take on Google Inc (GOOG), but I did not want take a position in the stock as it is volatile and requires capital to hold in large quantities. I see support for Google at the 50day moving average, but I do not want to go long the stock as Google is known to move fast and it often gaps up or down before trading hours. So I am making a bullish play using put options, while trying to reduce my negative exposure as much as possible.


I want to give the stock enough room to even move down to its 200 day moving average if needed. In this spread strategy I use put options. I will buy higher strike puts and sell 3 times as many lower strike puts around the 200 day moving average. Let's use a single contract as a base to explain the process better. In this example, the prices for the options are the ones which I got (so they are real numbers).

I bought 1 JULY 360 contract for $1.75/share and sold 3 JULY 350 contracts for $1.00/share. Since each contract represents 100 shares, if the share price stays above $360 by July 17th then, I net $125 based on (300 * $1) - (100 * $1.75). If the share price ends between $350 and $360, then I net the $125 profit plus the difference between $360 and the share price. And if the share price should drop below $350 then I am exposed for losses. The break down is as follows:

Note: Yellow highlights indicate transition levels and Pink highlight indicates breakeven level.
The above calculations are based on a single base (long put) contract.

Premium - recieved up front
Naked PUT Risk - risk assocaited with selling the 350 Puts
Long PUT Value - value of the bought 360 Put
PNL - Profit and Loss is the sum of the above 3 parameters

I realize that Google's earnings are coming out July 16th, a day before the JULY options expire.
But my view remains that even with bad earnings, technically, we should stay above the 200 day moving average at $350.