August 14 - Google Trade Setup

This trade is a bit out of character as far as following usual signals for my trades. But I have been following Google's stock for a while and believe that I'm familiar with its trading patterns. Given that there are no earnings news or other headlines, Google trades with the market - rising in an upmarket and falling in a down day.

Looking at the daily Google chart, it is strong to the upside. BUT I feel that there may be some loss of steam from the bulls. The trading range has narrowed and the climb has slowed.


Volume has declined and the MACD is ticking down while the price diverges to the upside. The markets are over-bought and a pullback is in order. Possibly a retreat to $440 for Google. I want to make use of this but I do not want to stand in front of a charging bull by shorting this stock.

For this purpose I will sell $500 calls for September on Google. I have sold numerous calls at the strike price of $500/share for September expiry for a premium of $2.50/share.

I do not plan to hold these options until expiry, I will buy them back at around 80% profit - at around $0.50/share.

I do have a spot-loss set up for this, in case the trade goes against me. If the premium doubles to $5 I will buy them back at a loss.... Let's see how the markets act in the coming weeks.

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.