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How to play GOOG Earnings : Part-2

Published on January 31, 2007

How to play GOOG Earnings : Part-2

January 31, 2007

After reviewing directional trades in Part-1, I am going to mention some non-directional trades. Let me begin by mentioning one of the strategy that OP reader Avi has shared. According to Avi,

“I am tempted to go in and collect money no matter which side the stock moves. I am thinking of going in with backratio spread. The trade will be:

  • Buy x contracts FEB540C and sell 2x FEB550C. This gives a credit of $XYZ
  • Buy x contracts of FEB 450P and sell 2x contracts of FEB 440P. this gives a credit of $ABC per contract.

If GOOG moves up, the put backratio trade goes worthless and I get to keep $ABC. I will also buy back 550C and let 540C run up.  If GOOG moves down, my Call backratio spread becomes worthless and I buy my 440P back, letting 450P run up. If you want to take more credit, you can even consider doing backratio for Mar on same bid/ask.” 

Here are my thoughts on the trade:

“This is quite an interesting trade and this will make money as long as GOOG remains in between $426 and $562 by Feb expiration. Potential gains, $330 (most likely) to $1200 depending upon where stock will be by expiration. Margin required is over $5330. The risk to reward is 6%.

Besides very low reward to risk ration, other issue that I see with Ratio spreads is that the risk is HUGE. If for whatever reason there is extreme reaction in either direction ,the losses will significant.”

I have initiated a paper trade to experiment:Goog Backratio-1

Here is the risk/reward chart if one wants to play it tonight:

Goog Back Ratio-2

Profitable trading, OptionPundit

2 Comments

  • Gene L says:

    Those positions are very analogous to being short straddles/strangles. They never seem to be sold very much because of the margin on the extra short call/put and most people not psychically comfortable with the risk/reward profile, pre earnings release, regardless of the implied vols or breakeven points.

  • […] Recap :I reviewed directional option trading strategies in Part-1 then I discussed (OP reader Avi’s) one non-directional option strategy in Part-2. Now I am going to share another non-directional strategy i.e. backspread (Opposite of backratio) for Google earnings. Here is what the trade might look like: […]

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