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Let Iron Condor Spread Wings Over Google

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Protect yourself by reducing costs, increasing odds of success.

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This article was written by Jason Ruchel of The Trading Pit.

Google (GOOG) is reporting earnings after the bell Thursday, and it's always a fun one to play in the options market. I don't really have a directional bias on it either way, but it's right at its 200 day ema, so odds are it makes a move from here. Usually Google has a decent move on earnings with 4 of the last 5 quarters seeing at least a 9%-10% move or more. At the same time, the options tend to underprice the potential move, so it's not a name I prefer to sell volatility on.


Click to enlarge


Usually, the play in this case might be a long straddle or something, but I want to reduce the cost and increase my odds of success, so I want to go long an iron condor.

This is a 4-legged trade, using the April options in which you buy a call spread and buy a put spread. Specifically, I want to buy the 380/420 call spread and buy the 380/340 put
spread.

You're paying a net debit as of right now of around $24. And since the strikes are $40 apart, that's the most the position can be worth at expiration on Friday. So a potential 66% return in 1 day is what you're looking for as a best case.

The max loss occurs at 380 at expiration, where you can lose your initial $24. But the probability that Google stays at 380 -- or anywhere near there -- is slim to nil.

Breakevens on each side occur at 356 and 404.

If you think Google won't break through that range, then you can narrow the strikes you use and increase your profitability range. One thing to note is that you want to initiate this trade when the stock is close to 380, or else adjust the middle strikes to the current stock price.



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No positions in stocks mentioned.
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