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Google Risk Alert – The Option Response

Google Risk Alert – The Option Response
by Michael C. Thomsett, contributing writer

(For those familiar with options trading and authorized to transact the following level of transactions)

Google (GOOG) fell and triggered its SmartStop today at $514.99, an indication that the equity is experiencing a period of above normal risk. What can you do?

A potential problem with any long options positions on Google is cost. Options on high-priced stocks like Google are very expensive. However, there are two possibilities based on the potential for downside movement.

1. Open a synthetic short stock position. This is a combination of a long put and a short call. For example, before the close today, the stock was near $517 per share. A synthetic short stock position could be opened using the July 515 options. The long put cost 10.40, and the short call gained 12.50. Net credit would be $210 minus trading costs. If you own 100 shares, this synthetic position included coverage on the short call side.

2. Open a variation on the same idea, a true collar. Use the July 520 call (17) versus the July 510 put (16). This is a net credit of $100 minus trading fees. If the stock rises,. you get exercised above current value. If the price falls, you can exercise and sell or just wait out the short call’s exercise. If stock price remains between $510 and $520, both options expire and you benefit from the cost-free downside protection between now and the July expiration.

A final note: If you are speculating on Google and the current price is above your basis, this may also be a time to just get out without protecting positions. Wait for a decline and time re-entry for the correction. In other words, the various option alternatives solve the problem, but at times the simple solution — like just selling — makes more sense.

Keep the probabilities on your side. If you had been following SmartStops, you could have exited at the first Risk Alert of the series back on 1/21/11 at $616.67. Over a $100 loss protection!

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