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Options Strategies from Fujisan

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Fujisan here.

First of all, I would like to express my greatest appreciation to Tim, who decided to take me in as a contributor to his site.  I know that he has such a high profile with thousands of followers, and yet he has so much courage to take in someone like me, who just showed up 6 months ago in another blog site started posting some charts and options strategies.  

I'm so thrilled with this opportunity and happy to be a part of his blog site.  I am a big fan of Tim, and his insights are always eye-opening, to say the least.  I will do my best to meet his expectation and I hope your visit to my posting would be worthwhile and help you make money.

OPX (Options Expiration) is here once again!

As many of you may know, OPX is one of my favorite week to trade and, when it's coupled with the earnings season, that would make it even more special.

One of my favorite stocks to trade in OPX is GOOG (yeah, I'm so original).  For many reasons, GOOG is very easy to set up a target for OPX.

I have discussed this before, but if you look at the OPX price for GOOG, they tend to fall in the 50 increments (i.e., 450, 500, 550, etc.).  With GOOG currently trading at 516, it's not too hard to guess the possibility of hitting 550 level by the end of OPX Friday.


To back up my price projection, I did a quick analysis of GOOG on a daily chart. (Click on any of these images to see a larger version)


As you can see, GOOG is in the final wave of "Three Drives Pattern" and there is a smaller "three drives pattern" within the final wave, both of which are indicating the price projection of right around 550.  When I see two same patterns indicating the same price projection, I call it  a "perfect symmetry" and gives me an extra confidence that the price will make it to the projection.

Now, to back up my assumption further, let's check the option open interests and see how the market participants are viewing GOOG's price action.


As you can see, the 550 strike price has the most open interests in Oct options.  Just like the chartists use MACD and stochastic as a part of their analysis, I use the option open interests as a part of my price analysis.  This is not an absolute measure and failed my expectation sometimes, but it served me well most of the time.  It's more like a "sanity" check.

Now that I feel pretty comfortable about the 550 price target for OPX Friday, how should I approach to the earnings play?

This is all up to the individual taste and the risk tolerance, but I hate surprises and I don't want to lose a lot of money over earnings, so here are some suggestions for GOOG OPX play.

Nov Bull Call Spread (Beginner to Intermediate level)

Here is 500/550 Nov bull call spread.  This is the combination of long 500 call option and short 550 call option which looks like this:


When you are dealing with the earnings, it would be wise not to deal with the front month options for many reasons.  I'm hoping that I could go over the details of the volatility pump and dump over the earnings someday, but for now, please just remember this:

DO NOT GO LONG the front month options right before the earnings!

Based on my observation for the past couple of GOOG earnings, it seems to me that GOOG tends to run up to right before the earnings, and then expire right around the same price before the earnings (i.e., the "good news" is already priced in so the stock price does not change much after the earnings).  If you have already gone long or planning to go long on Monday, make sure that you exit your trade before the earnings.  I don't think you would gain that much by holding on to your position through the earnings.  If you are expecting a blow off surprise earnings, there are better way to make money, but not with this bull call spread.

If you are new to the options and not comfortable with trading spread and yet like to participate this upside move, you can go with Dec 500 strike option, but make sure to get out of the trade before the earnings.

ATM/OTM Calendar Spread (Intermediate to Advance level)

This is one of my favorite earnings play by far.  You won't make a killing with this strategy but you won't lose much either even if you are wrong.  Here is the result of the ATM calendar spread in Q1 and Q2.


You can put this on right before the earnings right at the money (or out of the money – based on your bias) and take it out after the earnings.  This is the example of Nov/Oct 550 calendar spread.  You go long Nov 550 call options and short Oct 550 call options to make a calendar spread.  My guess is that GOOG  will run up to 550 toward Thursday closing and probably close right around 550 on Friday. 


Iron Condor (Intermediate to Advanced level)

Iron condor is a combination of two credit spreads – bear call spread and bull put spread.  Here is one of the example of 530/540/560/570 iron condor – a combination of 540/530 bull put spread and 560/570 bear call spread.  As you can see, you risk only $293 to make $707 and the risk/reward is so sweet.  This is called "pin play", i.e., to place your short strike close to your expected expiration price to maximize the profits.  Some people place a butterfly instead of an iron condor. 


Depending upon your risk tolerance, you can increase the length of the short strike to incease the probabilities (of course the higher the probabilities, the less the reward), but some people like to take more conservative approach to secure the profits.

OK, some of you may be totally confused, or no clue as to what I'm talking about…. but that's OK.  This could be a good start to get to know with the options, and if you are new to the option, please do yourself a favor and DO NOT trade through the earnings. 

I was planning to cover GS earnings play with a target price of $205, but I think this should be good for now. 

I hope you enjoy my posting today.  Have a good weekend, everyone.