Turning GOOGL Into Weekly Rental Income?
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Turning GOOGL Into Weekly Rental Income?

John F. Carter - January 13, 2016

Hey everybody, this is John. Welcome to the free video! Pretty fun trading day today. I love these violently sideways days in this kind of market. I mean, if you're prepared for them. They're good for both futures and options. One of the things we've been looking at on GOOGL is during yesterday's reversal it came down to 3 ATR.

Now, I know there's a lot of people here who are super bearish--I'm one of them--and there's a lot of people here who are super short, and at risk of just getting obliterated by a short-covering rally. So we've been playing things light, staying like, 85% cash and just kind of nibbling here and there. One of the trades we set up on GOOGL, was yesterday when we kind of reversed and closed strong, set an At The Money put credit spread.

A lot of times, people ask, well, "Why not buy 5 call options instead of 20 put credit spreads?" Well, the objective here is that we could actually get back to the mean, and 5 call options would be X. The idea is that, well, if you sell a put credit spread, you're just limiting your profitability, and of course that's a logical question to ask, except it doesn't take into account the much higher probability of making money on the put credit spread, should GOOGL just trade sideways. If your max profit--if you bought 5 calls, your max profit is going to be, let's call it $1,000, and you're risking $1,000 to get it. Well, great. You can set up enough put credit spreads so that even if GOOGL rallies to 100, which, let's be honest here, you wouldn't have held onto those 5 calls, you'd have taken profits, that you still can make the same amount of money on that put credit spread that you would have on the calls. You'd just have to sell more spreads.

So the question then becomes: We sold, at the time, that At The Money put credit spread for $4.10, okay, which is nice, and obviously it's higher probability if you sell at, like, say, one standard deviation out, but what I like about this is you get closer to a 1:1 risk-reward ratio, as opposed to, you know, if you sell two standard deviations out, and then the market just opens up with a flash crash, you're risking $20 to make $1, and just one of those can destroy your last nineteen profitable trades, whereas something like this is a lot more manageable. So now we sold it at $4.10, and yes, if we would have five options, then today we would have made--hmm, with the option--if the stock is up like 12 points we'd have made about 6 points on the option, so about $3,000. With 20 put spreads we made about the same amount. Not exactly the same, but you can kind of map it out that way.

At this point, the question is: When do you buy it back? I'd be fine buying it back at 80% of profit. We want to keep in mind, expected move into the end of the week is $14, and then we've got the options that expire in 10 days. So we're still well within the expected move not only for this week, but obviously for next week. So we just want to keep an eye on things. The good news is, GOOGL has had fairly good relative strength in relation to the market today.

The other thing that you can do with this is a diagonal, which we're going to look at setting up tomorrow. All that means is we can sit there and say, "Okay, great, we're looking for Google to go back to the mean, right?" Then I would like to look at, say, the $7.60 calls and sell those. I want to sell those $7.60 calls, there, but then, I want to go out--actually, that's fine, Jan 4--and buy a little bit more, I actually prefer a little bit more In The Money there. Let's call it $7.55. So in a perfect world, you own a $7.55 call that expires next week, but you sell the $7.60 call that expires this week. In a perfect world, the $7.60 call expires worthless, and then, as long as Google is holding out okay, you can hold the $7.55 call into the next week and turn it into a vertical. It's a pretty awesome strategy and it makes you theta-positive the whole time.