Breaking Down Google

Planning the Exit Strategy

By Bryan Bottarelli
Thursday, October 19, 2006 2:33 PM EST
Thu, 19 Oct 2006 19:33:00 GMT

Dear Bottarelli Research Member,

Charter Member B.K. writes in to ask about Google (GOOG – NASDAQ). He says, “Wonder if you’re going to give any guidance on how to close out the GOOG short term call play? Looks like GOOG has moved up quite a bit on good earnings news, but the calls have gone down, as have the protective puts I purchase. Do you recommend closing out now, or holding them? Please advise as I assume the values will drop significantly as they will expire after tomorrow”

As I mentioned when opening this trade, the fact that Google’s earning are set to come out one day prior to October expiration meant that we could play super-cheap October options (on an otherwise very expensive Google options string) for a speculative one-day earnings play. The idea, without question, is to use tomorrow’s earnings news as the catalyst to exit the position. By entering both calls and puts for a total basket price of $2.00, we’ll come out ahead as long as GOOG’s move pushes either side of the position above the $2.00 entry price. Let me dig a little deeper and break the entire positon down for you.

From what I can tell, it looks like the average tech-stock earnings reaction is a move of 8.10%. For example, eBay (EBAY – NASDAQ) is up 6.88% today, Apple Computer (AAPL – NASDAQ) is up 5.88% today, and Advanced Micro Devices (AMD – NYSE) is down 11.56% today — all on earnings-related news. Here’s the chart of AMD and AAPL so you can see the moves — both up and down — in graphic form:

AAPL

AMD

If we apply this 8.10% earnings-induced move to Google (GOOG – NASDAQ), we’re looking at a $34.83 move either up or down. A move of this magnitude would mean that GOOG could be trading as high as $461.83 or as low as $392.17 in tomorrow’s action.

Applying these figures to our GOOG October 460 Calls (GOP JL) and our protective GOOG October 370 Puts (GGD VN), the calls could trade as high as $6.10 and the puts could trade as high as $3.90 on any major break out or break down. Granted that’s a best-case scenario, but considering that our entry price on the total basket of calls and puts was $2.00, either scenario would witness you coming out well ahead of the game. Heck, even selling the basket for $3.00 would represent a 50% gain in one week, and I’ll certainly take that!

GOOG

Based on those calculations, I’d like to hold each side of the position into GOOG’s earnings after today’s close. For better or worse, we’ll be closing out the position tomorrow, so let’s all hope for a big time move! Until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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