Analyzing GOOG Implied Volatility Ahead of Earnings
Analyzing GOOG Implied Volatility Ahead of Earnings
My opiton mentoring students are often asking me to analyze stocks into earnings. I thought today I could give an example of what I might look at when analyzing a stock like GOOG. A head of earnings one needs to come to 2 conclusions:
1. Do I want to play Google earnings?
2. Do I want to play it from the long or short side?
In relation to question one there are people who play earnings one way or the other ever cycle. I think that is a terrible idea. Traders can play and play and play and then one day the stock moves more than anyone would expect (or a lot less than anyone would expect) and the trader ends up losing more than he or she had made in any of the previous cycles combined. Trust me, it happens (ask GOOG sellers a few cycles back).
I have found that question 2 can really answer question 1. Here is why, if you are looking at a trade and cannot figure out if there is edge from the long side or the short side then the best bet might be not to play the cycle at all. With that in mind, letís take a look at GOOG.
This is a look at the April Option Montage at about 2:45:
Looking over the vols one may notice how flat the vol curve is. Every strike is pricing GOOG around 65%; although it does have a bit of a break out skew (the wings are slightly higher). Pointed out a couple of things: the box in yellow is the straddle price, with Google trading right around 570, the straddle price is 27. This means that the market is expecting GOOG to move 27.00 or less 68.2% of the time (1 standard deviation). Google is expecting the stock to move less than 54.00 about 95% of the time.
One thing I love about stocks like GOOG is that with a somewhat flat earnings skew, the put spread can be sold at better price than one would expect and the call spread, which has a somewhat flat skew most of the time as is still, captures a decent amount of premium. This can allow us to set up a spread with somewhat favorable odds should we choose to. Thus, I might decide I want to go short GOOG into earnings.
Using the method I discussed yesterday the spreads I highlighted in red seem to be the most favorable option spreads to sell. Notice that I can sell the 615's and the 535's at a higher IV than both the purchases of the 620's and the 530's. If we set up a condor on 530/535/615/620 we can collect 1.15 against risk of 3.85, a potential return of 30%. With potential success of this trade at well over 70% odds of success (based on a straddle of 26.80) the odds of this trade do seem to land in the trader's favor. That said, itís not fun to lose 385 dollars against a 115 dollar bet and setting up our spread at only 35 points to the downside and 45 points could potentially hurt.
I do not know if this trade will win or lose, if I knew that I wouldn't be writing this blog. We all know google can make some MAJOR moves. This is just one idea, I am sure there are those that can make the case for going long premium. I am simply trying to find the most favorable trade. Over time a trader can eventually win, if he or she can play the odds the right way...that is of course, if he or she understand the odds.
note: this is not a recomendation nor do I currently have a position
Option Pit Happenings:
The VIX and the GVZ will be two of the Topicís Jeff Augen (author of Trading Realities) and I cover during a Special Pit Report (for paying members only) on June 21st. If you have interest in hearing Jeff and I discuss VIX hedging, GVZ, and a whole host of other topics, sign up for our Level 1 Large Group Mentoring or higher ASAP.
This will also be one of the topics I covering this topic in the special webinar series ëTrading ETFís in a Volatile Market.î Register here.
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