Alphabet ($GOOGL) reported some blowout earnings. Here’s how that iron condor trade that I described last week is going to work. (July 23, 2018)


So what’s the deal with Google ( NASDAQ: GOOGL )? Last week I covered, in the Chart of the Day video, that I was putting on what is called an iron condor on Google ( NASDAQ: GOOGL ) to take advantage of earnings and the fact that the stock was probably going to move quite a bit.

The idea was this: Look at the Options Market; look at the chart and pick a box that I think the stock will stay in. And I picked this box; between 1125.00 and 1275.00. It was based on the price of some of the options, based on the implied volatility, the implied move in the pricing of the April contract. I sold the 1275.00 call and the 1125.00 put on Google ( NASDAQ: GOOGL ). These are actually spreads; I created $10.00 wings. So 1125.00 put, short and 1115.00 put, long. The 1275.00 call, short; 1285.00 call, long. As long as the stock stays within this range Danny boy here is a very happy camper, I will get to keep all of it.

If, however, it starts to blow out it isn’t going to blow out the bottom. The only question is, whether it blows out the top? If it does that then I get to keep all this credit and I would have a $10.00 loss on the upside; because I sold the 1275.00 but I bought the 1285.00 calls so I would have a $10.00 on that. BUT, I get to keep the credit. And so the combined credit for both of these, for the bull put spread and this bear call spread; that combined credit was a little over $3.50. So I make 3.50 but the most that I would lose would be 6.50; that is a pretty good risk/reward when you consider the fact that this is so far out of the money.

Now, this gets me to our intraday action. The company reports earnings after the bell. What happens to the stock? The stock ramps up right away; knifed up and went clear up to 1285.00 and now it has since come back down. Now you can see the stock is trading down $30.00 below this post-earnings enthusiasm high. So right now as I look at this stock, I kind of like my chances. I am feeling pretty good, this will expire worthless, I could close this out tomorrow and just might do that, but I feel pretty good about my chances that the stock is not going to be moving up much above 1275.00. As long as it stars below here this trade will have been a home run for me.

If it does, however, start to move up what I am not going to do is buy this stuff back for a loss and keep moving it higher and higher. Instead, I am going to say, “Okay, well this part was a good trade, this 1125.00/1115.00, this was a real good trade here so I will go ahead and close that out. And then I will maybe sell the 1160.00/1150.00 or the 1180.00/1170.00 or the 1200/1290.00. Or maybe even the 1220/1210.00.” The idea being, that the money that I would be losing IF this stock just continues to run right through 1275.00, I have got to accept that as possibly being the worst case scenario. The stock just blows right through 1285.00 and I lose the maximum here.

But because I know the direction I continue to sell more and more premium on the other side and my bet is, even if Google ( NASDAQ: GOOGL ) does continue to go above 1275.00 this is going to be a winning trade for me just because the move will be so clear. It will be so clear because they did crush earnings, not really a surprise to many. But for the time being, like I said, “I like my chances on this staying below 1275.00.”

I just wanted to go back and cover that trade with you because I put it on last week and described it. I am sure I will look at this tomorrow as well.

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