Dissection of a Google Short Exposure Trade

On April 5th I posted a trade idea to to enter a May 555×545/525 1×2 ratio Put spread on Google. The rationale for the trade and the Strikes is in the link below. I took the trade for a 80 cent credit and unwound the last piece of it today. Like many trades it did not go completely according to plan but did return over 80% annualized on the margin used and $6.00 in real money. I will walk through the chronology of the trade here to illustrate how a real trade can evolve and hopefully give better familiarity to these types of trades. I have included a chart of the stock for the period covered below for reference.

4/5/2011 Entered the trade by buying May 555 Strike and selling May 535 Strike and May 525 Strike Puts in a 1:1:1 ratio creating the ratio spread for a 80 cent credit.

4/14 Google reported earnings after the bell and dropped like a rock. This was actually much faster than I had anticipated.

4/18 Worried about my downside naked 525 Puts, and not wanting to own the stock now that it had fallen so rapidly, I rolled the the trade to lower strikes, creating a 545/535 spread with a naked 505 Put. I was able to do this for free, and probably gave up some profit by both not doing it on April 15th and not taking just taking the spread off and then dealing with the naked put separately. But I accomplished my primary goal of reducing my risk of owning the stock. Real life.

4/27 When the stock started to rise I took off the 545/535 spread for 5.65, leaving me with the naked 505 Put.

5/10 Finally I bought back the naked 505 May Put for 45 cents. Could it have expired worthless, yes and it probably will. But the added return on the margin and the risk of a downside correction led e to take it off and I will sleep well having done so.

Recap: Net profit on the trade was $6.00 per ratio traded (80 cents plus $5.65 less 45 cents) on margin used of $7,752 over 5 weeks or a 80.50% annualized return. Could it have been much higher. Absolutely and I know some that did take the trade and made more. But I suspect that there are many more of you that did not take the trade and I hope that this dissection will help you to take the next one. It may be coming very soon.

Playing Google on the Short Side for No Risk*

As always you can see details of individual charts and more on my StockTwits feed and on chartly.)

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