Let's get back to the trade on Google. Like I mentioned in the original post, I am not interested in whether or not you would trade it. I enforced the trade, but wanted to know how you would go about this trade.


Let's examine the evidence. It recently broke $500. Where is it going? Can you say we have a target price on this one? If you were trading the recent flag, this would give you a target of about $525...and I don't see an option that will surrender a decent enough profit for the risk involved. Based on the price of these options you need to swing short & fast, meaning a front month or second month out option along with an aggressive strike. The problem I have with this is that I think Google will test 500 again before moving too much higher. You will then get stuck with melting time (expensive melting time I meant).

What can we do in an event like this? If there are expensive options, a reason to be bullish, but not a enormous movement expected....trade a credit spread.

Personally I would endorse a Bull Put Spread on this stock. Something like a 490/500. If I am convinced that Google stays above $500, then both options would expire worthless and I keep the credit to the account. Right now a $3 dollar credit is offered. Bid on the 500 is $8.70 and ask on the 490 is $5.70.

I will follow this up with a post on credit spreads. This might be a good teaching moment.

Posted by Option Addict on 11/22/2006 at 4:00 PM | Permalink