Google GOOG is reporting tonight after the close; analysts expect per-share results of $8.09, a 19% increase from year-ago numbers. Analysts have been hedging ahead of this report by sounding their opinions on the mega-cap shares.
ISI Group initiated coverage on the shares with a “hold” rating and a 12-month price target of $675. This target allows for just 7% in upside, in line with the 7% GOOG has gained in the past 52 weeks. (In the past six months, however, the stock has rallied 35%).
Elsewhere, Oppenheimer upped its price target on GOOG from $640 to $705 with an “outperform” rating on the stock. The firm noted that non-search revenue has improved at the search giant.
With one pundit in the neutral camp and one thinking bullishly, we have outlined two different option strategies below. These illustrations demonstrate how an investor could use options in lieu of buying the stock outright (or attempting to short it).
The strategies outlined below (one bullish, one bearish) are for educational purposes only and do not represent buy, hold, or sell recommendations. Prices were taken Wednesday afternoon, when GOOG shares were trading at $630.12, down about 1.5% for the session.
Moderately Bullish Option Strategy: Covered Call
Those who expect modest upside in the shares could trade a covered call (also called a buy-write), which combines a long stock and a short call. For example, traders could buy 100 shares of Google for $630 and simultaneously sell the 635 call for a credit of $26.70. This effectively makes the GOOG purchase price $603.30. This trade still costs more than $60,000, so this investment isn't for everyone.
At expiration, the position is profitable anywhere above breakeven of $603.30, which is the stock's purchase price less the credit collected. The maximum gain is $31.70, or the five-dollar gain in the stock between $630 and $670 plus the $26.70 credit. Gains top out at the 635 strike and above. Below the breakeven price, losses are in line with the long stock position, all the way down to zero.
Charts courtesy of the OptionsHouse profit/loss calculator. This is one of many tools investors have access to as part of a virtual trading account.
Bearish Option Strategy: Put Tree
Traders who expect Google to continue drifting lower could consider the put-tree strategy. The ideal candidates for this three-legged approach are stocks expected to decline a certain amount and then bottom out.
Put trees are similar to ratio put spreads with the distinction that the two sold puts are at different strike prices. In this situation, Google bears could buy the March 630 put, sell the March 610 put, and sell the March 590 put. This trade can be made currently for a net credit of $2.30 per put tree.
Looking ahead to what this strategy would look like at expiration, the maximum potential profit – if GOOG were to be trading between the 590 and 610 levels – is $22.30. This is the difference between the higher-strike short put and the long put, plus the initial credit.
If GOOG is trading at the 630 strike or anywhere above, gains are capped at the $2.30 premium collected at the outset of the trade. Below the breakeven price of $567.70 (the lowest-strike put less the maximum profit), losses begin to build. The maximum loss is similar to a long stock position because of the naked short put. Losses unlimited down to zero but theoretically capped at $567.70.
Want to learn more about the put tree strategy? Check out our free archived webinar about the topic. This was part of the Two Traders, One Strategy series of webinars I co-host every week.
Photo Credit: agius
The above information is provided by OptionsHouse, LLC (“OptionsHouse”) for informational and educational purposes only and is not intended as trading or investment advice or a recommendation that any particular security, transaction, or investment strategy is suitable for any specific person. You are solely responsible for your investment decisions. Commentary and opinions expressed are those of the author/speaker and not necessarily of OptionsHouse. Neither OptionsHouse nor any of its employees, officers, shareholders or affiliated companies guarantee the accuracy of or endorse the views or opinions of guest speakers or commentators. Projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature and are not guarantees of future results. Any examples used that discuss trading profits or losses may not take into account trading commissions or fees.
Share and Enjoy:
Related posts:
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
Comments
Trade confidently with insights and alerts from analyst ratings, free reports and breaking news that affects the stocks you care about.
