Google Earnings: Bagging the Big Trophy Buck [1040% Return]
Google reported blow out earnings after the bell Thursday. This, coupled with Friday’s monthly options expiration, was the perfect catalyst for an explosion in Google’s call premiums expiring on Friday’s close. No one has a crystal ball - myself included. Lately, as you can imagine, I’ve received questions surrounding what compelled me to get long out of the money Google calls [GOOG 570 Oct strike] in front of earnings.
Twitter is a great community for finding like-minded individuals. We’ve made lots of friends in this new community based upon sharing and have had the opportunity to look over the shoulders of some excellent professional traders - learning from them. Twitter is full of great trading ideas, opinions and also some pretty lousy or confusing ones too. What’s most important is who you follow - who you choose to listen to. Often, less stream information, I find, is many degrees more useful.
I can’t take credit for hatching this Google trade. It came to me via Robert Lang (http://twitter.com/aztecs99) who reached out to me privately Sunday to share this potential Google setup in front of earnings. We discussed it at length and decided it had great potential (and great risk too). Many props go to Bob for his repeated astute insight…these are the trades that, as an option trader, we dream about and relish years later. Bob said it best in email last weekend:
“Ok, we know how legends are made, right? Stepping out on the edge and making the call and putting $$$ on the line…getting it right. Ok, I have had my share of these and many BAD calls, too. However, when I find something very compelling I go for it. I don’t know the future but I know when setups are there for a good payoff. Thing is, the big payoffs need to be ‘prepared for’ you cannot get done if you’re late or hesitate. So, I’m looking at Google this week. Earnings on Thurs after the close, day before expiration. I‘ll either hit it big or not…but I know precisely my risk”.
So the plan was ‘hatched’ and the hunt had begun. What I hoped for was a big Google take down in front of earnings so that I could get long upside out of the money calls on weakness. As I stalked Google all week, pullbacks were almost non-existent. I could find this monster buck’s trail, but it remained elusive for days. I knew the NASDAQ 100 was close to taking out April’s highs and wanted in on the Google play.
I started off buying a few calls on weakness Tuesday to establish a position. Then I waited patiently for more weakness. It was not until Thursday afternoon that I started to add to the position [GOOG OCT 570 calls] on broad market weakness in front of Google’s earnings that afternoon. Time was running out and premiums were coming out of calls fast.
During the Thursday afternoon take down I posted that I was long the calls in front of earnings and provided its weekly chart:
http://twitter.com/Xiphos_Trading/status/27368646417
I had shared this weekly chart with 3 trusted option professionals earlier in the week and oddly enough had received the same response from each one. Basically, I was asked why the Google weekly chart? Who cares about it; what’s important with a few days left is how the daily chart looks. Well, the daily chart was irrelevant to me. What mattered most was the bullish expanding wedge on the weekly chart and how we were parked just under this critical resistance. I figured that if Google surprised to the upside, it would be just the catalyst to really pop the stock based upon the weekly technicals and OpEx on Friday. The rest is history.
Below are the screen grabs for the 30 calls purchased in this particular account:
Tuesday’s initial position buy
Of important note is the last purchase on Thursday with less then one minute until the close [see the Oct 14 13:59:11 time stamp]. You will see 5 calls were filled at 1.85/contract 50 seconds before close as Google was screaming much higher. I purposely put in low ball limit orders in 2 separate accounts just in case the big option fish decided to run the Google option stops right before the close to shake out the weak hands that use automated sell stops. It worked perfectly for both of us!
So the total cash outlay for this 30 call position in this acount was $7,333 excluding trade commissions. A considerable risk I took for a one day trade that could have easily gone completely bust. I could have just as easily lost the entire premium I had put up - but not more than that. This was the risk that I was fully aware of.
So we know what happened, Google blew it out and opened gap up around 600 - a 60 point move up from the previous day’s close. So, how did I decide to trade my position Friday?
The first thing I attempted to do on the opening Friday morning was sell short an equal number of units of GOOG OCT 600 calls to take advantage of the premium spike (+1,500% when Google opened!) and lock in most of my profits. Unfortunately, I was prevented from doing this by my broker - Interactive Brokers - which rejected my market sell order 30 seconds after the open. This happens more than you expect on trades like this and it cost me approximately 400% additional return, but that’s how the game is played.
Instead, I quickly realized that the only option I really had was to start liquidating my GOOG 570 call position. When I started doing this manually around 07:32:43 (see below) the premiums were plummeting and I knew I had been had, but it was all good. After a few minutes of being shut out, IB mysteriously allowed me to begin selling the GOOG 590 call short to create a the other side of my call spread now that the premiums had dropped several hundred percent. I started doing this to protect myself and try to lock in profits without having to liquidate the whole GOOG 570 position and possibly miss more upside later in the day.
You will see my trades were not close to perfect if you examine them below in detail. You’ll see me trading first out of some 570s, then into 590 hedge, then out of 590s as Google began to climb, then completely closed out the 570s before the bell.
Friday Google call trades are here.
Lastly there is the position squaring and P&L statement for all of the trades above that can be found here: GOOG 570 / 590 call spread profit.
So total capital outlay was $7,333 — total profit was $76,301 for a net return of 1,040% excluding trade commissions. So this is the post mortem of how I - with the critical help of my close trading gang, bagged the big bucks.
We seldom provide this level of transparency into our trades. You will notice there were lots of trades made for these two option positions. Our book can and often does have 25-50 positional option trades at any one point in time (spreads, hedges, speculative positions, etc.). It’s simply not feasible to provide this level of transparency given the types of trades were are involved with.
All the best to Everyone,
Xiphos Trading
