Friday, May 14, 2010

GOOG Short Set Up!

GOOG broke down on heavy volume in mid-April after a disappointing earnings annoucement and then followed through to the down side to complete the right side of an inverted cup. It has now pulled back to the break out level ($520.00) which represents alot of over head resistance during the recent bounce in the markets. The set up is almost identical to that of MSTR, the short trade I took earlier today.

With the higher priced stocks like GOOG, V, and AAPL for instance I like to use options because of the excellent liquidity of their options and leverage. Leverage works both ways but on these high probabilty set ups I do not mind taking on extra risk.

My plan is to purchase the 10 Jun 520 Put option contract on a break of yesterday's low $510.00. My stop will be at $522.00 and my target on this trade would be the most recent pivot low of $460.00. This option has a delta of about 56%. So I estimate my risk on this trade is about
$672.00 ( (522.00 - 510) * 0.56). However, this will be less since the delta will fall as the price rises. While the reward is potentially $2,800.00 ((510 - 460) * 0.56) but this will likely be more since the delta will rise as the price of GOOG falls.

The R size on this trade is 572% greater than what I usually take! In principle this trade does not fit the risk profile of my typical trades. However, with these options trades I have no plan of sitting on my hands while this moves against. I will only hold onto this position if its profitable from the onset and remains that way into the close. Then I will continue to hold as long it remains profitable. Otherwise I will be very quick to exit. Especially if it moves sharply against me as soon as I enter. In reality, once I see a loss of about $150.00 to $200.00 (or a 3 -4 point move against me) I will exit this trade.

So my plan for tommorow is to keep monitoring my MSTR position which has a very small open profit and to enter GOOG short if it triggers by purchasing the 10 Jun 520 Put.

Good luck and good trading!

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