Google Earnings Trade Idea

• Posted by Greg Harmon
• on July 14th, 2011

Google (ticker: $GOOG) posts earnings tonight after the close. This stock can have massive moves so it has lots of potential for a directional bet. Not knowing the fundamentals at ll though I take a look at the price action and see that there is still some opportunity for an earnings trade. Take a look at the daily chart below. The recent pullback found support at the 473 area. This is just below the 76.4%

retracement of the major move higher to about 643, at 484. The 480 level is also the mid line of the range that launched it higher. But before it gets there support can be found at 525 and between 509-513. To the upside there is a broad gap between 546.5 and 555 and then the 200 day Simple Moving Average (SMA) at 571 before the formal gap higher near 580. That covers a lot of range. It is also worth noting that the maximum volume at price in this range (480-580) comes between 520 and 540, right where it is now.

Moving to the options market to look for a play, since there will only be 1 day to expiry on the July Options, it shows the at the money Straddle pricing in about a 5% move or $27, making a range of 505 to 560. Implied volatility is high in at the money 1 day options at over 100% compared to the August options at 31% and historical volatility at just over 21%. So what to do? Buying or selling the Straddle for $27 seems like a lot of risk. Strangles allow for more protection, at the expense of some potential gain. From the chart above I am looking at the safety of the 580 strike call with all those layers of resistance along the way and a requirement of a one day move of over 9% up, and the 480 strike puts. Selling this Strangle gives a premium of $1.81 as I write this with a great degree of confidence. If you can keep the entire premium, meaning that GOOG closes between 480 and 580 Friday, then it creates a 1 day return of 2.7% on the margin used (about $6700 at my broker).

Summary: Sell Strangles, $GOOG July 15 580 Call and Sell $GOOG July 15 480 Put for $1.81

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

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