Google Spurs Straddle Trades Ahead of Earnings Report

Google Spurs Straddle Trades Ahead of Earnings Report

By TENNILLE TRACY
April 18, 2008; Page C5

There was little room for error in the options market Thursday as traders counted the hours until April options expire and a handful of big companies, including Google, released quarterly earnings.
While the days leading up to monthly expiration dates are always hectic -- with traders adjusting their positions before options become worthless -- Thursday's market players also had to brace for earnings from Google, Capital One Financial and Intuitive Surgical, all of which issued results after the bell.
The combination of events made options trading more risky, and traders who dared to make new bets on those companies have just a few hours to be right.
"I think the last few days of expiration are a professional's game," said Joe Kinahan, chief derivatives strategist with ThinkOrSwim. "We encourage retail investors to get out."
Given the unique circumstances, a lot of traders hoped the companies' earnings would lead to big moves on Friday. They adopted "straddle" positions in several of them, buying a call contract that allows them to buy the stock at a predetermined price and a put contract that allows them to sell the stock at the same price. The position makes money if the underlying stock moves more than the combined cost of the contracts.
In Google's case, such an approach could become hugely profitable. The Internet giant reported that its first-quarter profit rose 31%, despite concerns about its core search-advertising business. The news pushed up shares in after-hours trading.
Traders who bought the April $450 straddle on Thursday paid $30 for the position and are poised to collect profits if Google jumps above $480 or drops below $420 before the day ends. Google ended Thursday's session at $449.54, down 1.2%.
Traders also picked up large volumes of Google's May contracts, focusing on the $500 calls. Priced at $7, those make money if Google rockets up to $507 before next month.