Playing the Expiry for September 3, 2010: Google (GOOG), Goldman Sachs (GS)

Before I begin this week's PTE, I wanted to make sure people understood the reasoning for creating spreads, instead of writing the options uncovered. Spreads, which do lower one's profitability, increase protection. In the last two weeks, the long portion of the spread was not required, but due to the high cost of the underlying security, one contract can eat up a lot of margin, thus, we create a spread, so that the total margin used is only the net debit of about $800 versus the uncovered margin requirement of about $13,500.

This week, we have two trades that I want to bring up, both are bear put spreads. The first is, once again, Google [GOOG:NSD]. This week we will implement a bear put spread on Google, trading at $461.10. The overall market's two-day rally will more than likely halt on Friday, and if there is a bad jobs report, we could see more selling. This week, I suggest you go long the 470 put (in the money) and sell the 460 put (out of the money). The current natural prices respectively are $9.30 and $2.00, creating a net debit of $7.30, meanwhile, the stock is at $461.26.

Unlike the previous recommendations, this trade has an out-of-the-money option. In this scenario, your break-even is $462.70, but you can also make money two different ways. The first is having the long option increase in value. If Google were to close on Friday at $460.05, your long option would be worth $9.95 (increase of $0.65) and your short option will expire worthless, allowing you to capture the $2.00. The maximum profit is $2.70 for a $7.30 trade, or 36.99 per cent.

Disclaimer, my fills, prior to writing this, were $8.00 and $1.70 (net debit of $6.30 and a max profit of $3.70).

The second trade is a bear put spread on Goldman Sachs [GS:NYSE]. The company, trading at $139.10 now, has had trouble creating real support at $140. Today, I tried to buy the 145 put for $5.10 when the stock was at $139.99, but due to my broker's requirement on trader review, I cancelled the order; I did not want to wait a minute just to get the order opened and approved. Anyways, implement the bear put by buying the 145 put and selling the 140 put. As of right now, the stock is down, and time value has disappeared on the 140 puts, but if the stock rallies back near 140, consider buying the 145 put for $5.20 and selling the 140 put for $1.00 (natural values when the stock was at $139.99 earlier today), creating a net debit of $4.20. Your break even price is $140.80, and your maximum profit is $1.20 for every $4.20 spent, or 28.57 per cent.

Remember, you can follow all P.T.E. recommendations above, or clicking here.