Google (NASDAQ:GOOG) pre-earnings options strategies

Google Inc.

Google GOOG has been all over the news lately, so let’s briefly hit the highlights. Last Wednesday, JP Morgan cut its earnings estimates for the second quarter and lowered its 12-month price target on the shares to $566 from $639 (though keeping a bullish rating of “overweight”). In a similar move on Thursday, an analyst with Oppenheimer trimmed his earnings outlook on the Internet giant and dropped his price target to $500 from $715 (keeping an “outperform” rating). Both “overweight” and “outperform” are essentially equal to a “buy” recommendation.

Then on Friday, the stock was boosted higher after Google renewed its license with China, allowing it to keep operating the google.cn website within the People’s Republic. This is currently the world’s largest market when it comes to online users, but there had been speculation for months that Google would choose to exit the country due to censorship laws. The stock moved higher on this news, outperforming the broad market on Friday.

Investors who believe Friday’s gains could carry through into next week could be considering bullish strategies such as the bull call spread we’ve outlined below. On the other side of the fence, contrarian investors could be looking into a variety of strategies that would benefit if GOOG heads lower. The examples below are hypothetical and should not be interpreted as buy/sell/hold recommendations. Always consider your risk/reward parameters before placing any new trades. Prices are given as of Friday afternoon, when GOOG was trading at $464.48, up $7.92 (1.7%) on the day.

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Bullish Option Strategy: Bull Call Spread

Bullish investors might consider a very short-term play that could capitalize on the company’s earnings report. Note: Google earnings are due out July 15 after the market close and analysts are expecting per-share results of $6.54. The July 400/470 call spread can currently be bought for a net premium of $55 (buying the 400 call, selling the 470 call).

The maximum the investor can lose is significant! 100% of the premium ($55) paid, if GOOG were to plunge below the $400 level in the next week. The maximum investors can gain, on the other hand, is $15, if GOOG moves above $470 (an advance of roughly 1%). This is an example of a long theta call spread. Time works for the owner here if the stock doesn’t move this position will become profitable over time. Breakeven for this call spread is $455, or $10 below the stock’s current level. Lastly remember to close this spread out before expiration to avoid automatically exercising the in the money 400 calls and finding yourself long stock on Monday.

Bull call spread on GOOG at expiration

Bearish Option Strategy: Long Put, Bear Call Spread

Those who feel GOOG may retrace today’s rally and more downside is ahead could think about the combination of a long put and a bear call spread. Through this combination trade, the premium collected for the short call spread helps finance the purchase of an out-of-the-money long put. By buying the January 2011 450 put and selling the 490/590 call spread (selling the 490 call, buying the 590 call), the investor pays a net debit of $12 per spread.

If GOOG is trading anywhere between the 450 and 490 strikes at expiration, they lose this premium paid. Below the breakeven of $438, gains build dollar for dollar as the stock moves lower. Above this breakeven price, losses grow until the 590 strike, where they are capped at $112, or the difference between call strikes minus the premium paid.