Google (GOOG) Going to $600

A little over a year ago I went to one of those free trading seminars provided by companies that want you to sign up for their coaching or training.

The concept they were teaching was day trading and so it did not interest me very much, but a couple things the speaker said were very interesting. The guy’s name was Tom Busby.

He said that once a stock breaks a hundred $ level for the first time it zooms up 10%.  For example, once a stock breaks through $100 it is going to $110. When it breaks through $200 it is going to $220, etc.

I had heard this before somewhere so I started looking it up. It turns out that Jesse Livermore mentioned this in one of his books. Livermore was probably the best trader of all time.

So now with two reference points I decided this was something worthy of looking into. So I started doing some research.  It turns out, that this theory/rule is true.

I checked with over 40 companies that broke through either $100, $200, or $300 and  84% of then did eventually hit $110, $220, or $330. The average time it took was 4 months. Some did it much faster and the slowest took 8 months, but it got there.

One thing I noticed is that this does not work all the time. It works only in bull markets. And this was also a limited sample.

If this theory holds, then Google (GOOG) is poised to hit $660, and Apple (AAPL) is going to hit $220. As I write this, Apple (AAPL) is already above $209 so $220 is not much of a stretch.

How should you play this?

1. You can buy the stock and wait.

2. You can buy a call option on Google (GOOG) at 660 with at least 4 months of time left to expiration.

3. You can sell puts month after month until Google (GOOG) starts to decline.

All 3 methods have their pluses and minuses. I am already long the stock, and have sold the Jan 560/570 put spread. As long as the bull market stays intact, I can sell more puts.  When Google (GOOG) breaks below the 50 day moving average, I plan on selling my stock and looking for another company to play.

When Do I Buy Back A Credit Spread?

Here is a question that comes after reading Lesson 2 in my 9 Lesson course on selling options.

When you say, to buy back the option before, the expiration date, don’t you incur additional costs, that reduce your profits even further ?

Good question. In some trades like the Calendar spread you have to buy them back because you don’t want to get long the option. But in an iron condor or credit spread, you can wait and let the options expire. If you buy them back you incur commissions plus whatever you are buying it back for.
 
In many cases it is a question of risk vs cost.  if there is a lot of time left before expiration, you are probably best buying the trade back in case there is a move against you and you end up losing money. On the other hand if you let it expire you can save a few dollars and maybe 1 or 2% points on the trade. 
 
So lets say you it will cost you $20 to buy back a trade, but if the trade moves against you, you could lose $1,000. Do you take your profits or hope for that last $20. Even if the trade moves just once against you in 4 years, you still lose money.
 
Make sense?

Here is a real life example.

On October 12, 2009  I did a credit spread on AAPL. I Sold the Nov 165 Puts and Bought the Nov 160 Puts as protection for a credit of .50 on each spread. There were about 40 days to expiration.

On this trade if the puts expired worthless I would make 11.11% before commissions. (Credit of $50 divided by max loss of $450 per spread = potential return of 11.11%) 

Well AAPL just had earnings yesterday and the stock shot up to about 200 today. This morning, I was able to buy back the credit spreads at .07 each.

So I made .43 per credit spread in 8 days.  That is 9.5%

Why did I buy the spreads back? I could have let them expire worthless. If I did i would make another .07 per spread. But there is still 31 days left to expiration. So I decided to make my profit and money and look for another trade.

Who knows? Maybe AAPL will settle down and I will sell another credit spread on it this month for more credit. Or maybe I will do something else. All I know is that I don’t want to risk losing $450 per spread (anything can happen and APPL could drop in price) to make another $7 per spread.

Yes I did pay the commissions by buying the spreads back. But on each spread I paid $2.50 in commissions.  $2.50 going in and $2.50 coming out which is a total of $5 in commission per spread. So instead of mkaing $43 per spread I made $38 per spread which is still 8.44%.

(That’s why having an option friendly broker is so important. I pay $1.25 per option with no trip charge. If you are paying $10 plus $1 per option or some other crazy commissions then you ae playing a game that is stacked against you. Get a better broker.) 

In my opinion, take off your spreads when they are close to worthless if there is alot of time left. Take your profits. Everyday your money is out of the market is a day you cannot lose it.

This is not to say I never let my spreads go to expiration. Sometimes I do, but not too often on a highly volatile stock.

May Trade Results

For the month of May, my results were a nice gain of 11.71%!

This is following a nice double digit gain last month.

We had four trades this month:

1. SPX, the S&P 500 index
2. RUT, the Russell 200 Index
3.  AAPL, Apple Computer
4.  WMT, Wal-Mart.

I recorded double digit gains on three of these and a 9.5% gain on the SPX position.

Just another day at the office.

OptionGenius.com members can see each trade and any adjustments on the Past Trades page in the membership section of the site. If you are looking for double digit monthly returns, what are you waiting for? Sign up today. I already have one trade for June underway and I am looking for more.

One of my favorite habits is to reward myself after a positive month. To treat myself,  my wife and I go out to lunch at one of our favorite restaurants. Normally it is my favorite, On The Border. But this month, I think we will go out for Sushi. Since my wife introduced it to me I have really started to like it. But I still need here to mix the Soy Sauce and Wasabi together. Someone it just tastes better when she does it.