Google Should Have Been Strangled

What a morning. As I mentioned in the blog last night, Google (GOOG, $536.40, up $86.86) was up over $80 in after-hours trading and settled at $525 by 8PM. Those gains held as the stock opened at $535.

The April 500 calls (GOPDO, $39.00, up $38.45) and the May 500 calls (GOPEO, $47.61, up $40.61) made a few people a small fortune today. The April calls represent nearly a 7000% return from yesterday’s close of 55 cents. This certainly would have been a lottery option play but as you can see they do pay off. If you had bought 10 contracts for $550 yesterday, you would now be sitting on $39,000! The May 500 calls returned a solid 515% but pales in comparison to the April call ROI (return on investment).

I wanted to illustrate these two examples because if Google would have failed to impress Wall Street and was trading lower, your April calls would be worthless and your entire investment lost. The May calls would have lost a significant amount of money although they do not expire until next month.

For example, for those who thought Google was going to fall below $400 on a bad earning report most likely would have bought the April 400 puts (GOPPT, $0.05, down $1.30). Although they still have an ask of five cents, the bid is zero. If you would have bought 10 contracts yesterday for about $1400, it is now worthless. The May 400 puts (GOPQT, $0.22, down $6.78) have lost 96% of their value. It would have cost you $7,000 to buy 10 contracts and now that would be worth a whopping $220.

The best play on this would have been a strangle option trade. You could have bought the April 400 puts and the April 500 calls for virtually a risk free trade based on your assumption of at least a $50 move in the stock. As you become better traders you will see these opportunities in the market. However, today’s example is rare but as you can see, totally possible. Google’s move today is its highest dollar move ever since becoming a publicly traded company.

Rick Rouse
Rick@OptionsMentoring.com

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