As investors anxiously await Google’s earnings announcement after the close today I got to believe there is an option trading opportunity. The April 575 straddle is trading around $27.70
I have no interest in buying all that time premium and I am too scared to sell it. Is there another trade I can do where I’m in the game but just outside the sidelines? I wonder what the expected movement of this stock is. Let’s get our #2 pencils out and figure Google’s standard deviation with a day to go.
Google is trading around 575 and the implied volatility of the April 575 put and call is around 78%. Using these numbers and the formula below we can determine what the options might be implying.
Stock Price x Implied Volatility x √Days to Expiration = SD
√ Trading Days in a Year
575 x .78 x √1 = 28
Since an at-the-money straddle indicates a 28 point move in Google, how about selling options outside of what the market is anticipating.
What if I sell the 605/545 strangle which is trading $6.75 This trade keeps me in the game with the options I’m selling just outside the standard deviation. If I’m right I get paid tomorrow. If I’m wrong? Buckle up…we’ll all find out tomorrow.