GOOGL Analysis

Update 2/4/2016: I exited the MAR options on GOOGL at 51% of maximum potential profit and shall roll the position forward within a few days.

GOOGL	vertical
option	credit	debit	profit	yield	entry	exit	days
-c700dec (c735dec)	11.50	-32.35	-20.85	-64.5%	10/22/2015	11/3/2015	12
-c700jan (c735jan)	29.15	-30.00	-0.85	-2.8%	11/30/2015	1/4/2016	35
-c780feb (c795feb)	4.35	-2.05	2.30	112.2%	1/8/2016	1/20/2016	12
-c785mar (c800mar)	4.85	-2.40	2.45	102.1%	1/22/2016	2/4/2016	13
-----------	-----------	-----------	-----------	-----------	-----------	-----------	-----------
Status:	49.85	-66.80	-16.95	-25.4%			72
option description key: long/short, call/put, strike, series

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Update 11/30/2015: GOOGL moved opposite my bear trade into unprofitable territory. With expiration looming, what to do?

Long story short, I have rolled out of the DEC series options to JAN series options, buying some time for a reversal. The discussion below is my rationale for extending the trade rather than taking my loss and freeing up buying power for other purposes.

GOOGL has been in an uptrend for decades. The most recent rise began from a low in January. I am turning to Elliott wave analysis to better understand where GOOGL stands.

Click on chart to enlarge.

GOOGL 11/30/2015, 1 year daily bars

The analysis shows that wave 3 {-1}, typically the longest impulse wave of a five-wave set, has met the minimum requirements for completion. If the pause of the past week indeed marks the end of the wave, then I expect a 4th wave correction to the downside followed by a 5th wav up, which completes the rise from October 2008, the Great Recession low.

If I can buy time through rolling the trade, then the wave pattern will have an opportunity to complete its work and move to the downside. The beauty is that premiums are so high, rolling can almost always be done for a credit.

Here's what I've done. The exit from the roll position, in this scenario, comes at 50% of potential profit. The overall net profit from the entire position -- the initial position and the roll -- is $22.98. An simple exit would have produced a net loss of $20.95. 

Roll to the same strike	Premium	Stock price	Position
10/22/2015	11.50	682.24	enter initial
11/30/2015	-32.35	766.73	exit initial
11/30/2015	29.15	765.50	enter roll
By 1/15/2016	14.68	TBD	exit roll

I used Elliott wave analysis in making my decision. Below are some links to details about that analytical method.

Elliott wave analysis tracks patterns in price movements. The principal practitioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading. 

Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.

See my post "Chart Analysis: Nomenclature" for an explanation of my method for labeling waves on the chart.

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The diversified technology company Google Inc. (GOOGL), headquartered in Mountain View, California, publishes earnings on Thursday after the closing bell.

[GOOGL in Wikipedia]

GOOGL

I shall use the DEC series of options, which trades for the last time 57 days hence, on Dec. 18.

Ranges

Implied volatility stands at 34%, which is 2.3 times the VIX, a measure of volatility of the S&P 500 index. GOOGL’s volatility stands in the 64th percentile of its annual range.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	775.07	867.89	781.14
Lower	589.41	496.59	585.46
Gain/loss	13.6%	27.2%

Implied volatility 1 and 2 standard deviations; maximum earns move
The Trade

Analysts expectations for GOOGL suggest a bearish earnings surprise and I shall trade in accordance with those expectations.
Bear call spread, short the $700 calls and long the $735 calls,
sold for a credit and expiring Dec. 19.
Probability of expiring out-of-the-money

DEC	Strike	OTM
	700	59.3%

The premium is $11.50 which is 33% of the width of the position’s wing. The stock at the time of entry was priced at $682.24.

The risk/reward ratio is 2:1.

The strike is $14 above the price. The biggest immediate move after each of the past four earnings announcements was $16.26, and the average was $6.62.

Decision for My Account

I've opened a position on GOOGL as described above.

-- Tim Bovee, Portland, Oregon, Oct. 22, 2015

References

Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.

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Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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