By Darrell Martin
The 2014 fourth quarter financial results for Google are expected to be released on Thursday, January 29, 2015 at 4:00 p.m. EST, but sometimes it is released early.
This is advantageous to you because you can use the 4:15 p.m. expiration and still be able to trade this potentially big mover.
During The Diagnostics Trading Hour on TFNN on Tuesday, January 27, Darrell Martin cautioned listeners about trading this type of news event. Martin said that as it gets closer to the release of the earnings, the markets will be affected.
This expectation of movement will be priced into the options themselves making them more expensive. There is a large move expected but the direction and the amount of that move is unknown. Many times traders will buy into that expectation thinking that if it is trending up, it will continue to trend up only to find that once the move happens, the premium is ****ed out of the option/contract price and the price drops.
The earnings report comes out, the price drops down and the trader finds he has learned a valuable lesson he hopes he won’t have to repeat.
It is widely known in the trading world that Google (NASDAQ: GOOG) affects NASDAQ.
For this reason, Martin discussed on The Diagnostics Trading Hour performing a two-layered strangle trade using binaries. Martin doesn’t recommend trading spreads on this event, but prefers to use binaries to strangle. The strangle strategy is where you want to wrap your trade around where you expect the market to go so you can squeeze all the profit you can out of the move.
You expect a big move. You don’t expect the market to stay where it is presently trading. For this reason, you would buy the upper binary and sell the lower binary, if you were doing a regular one-layer strangle.
Looking at the following chart may help you understand the concept behind two-layer or multiple layer strangles. To view a larger image, click HERE.
When trading on Nadex, NASDAQ is traded as NQ (US Tech 100). The first layer are strikes closer to what the expected move will be. The idea is that one side will be hit so you can immediately take profit.
The second layer is the “long shot.” When Google Earnings come out, everyone expects big earnings and big moves. To further protect your account, you can use the profit from the closer, higher probability strangle trade to cover the long shot.
This can actually be a multiple layer strangle where you can layer out of some long shots, i.e., when the strike is hit, let some go further and make more if the market keeps moving. This is a narrow strangle with easy profit followed by a wider strangle which is paid for by the narrow strangle when profit is hit.
The wider one will have a bigger payout, especially if you do multiple contracts of 10, 20 or even 100. An important thing to remember is to always exit all the narrow profitable side contracts. There is no reason to close the other side because it is probably at max loss. On the wider strangle, you can close out half of the winning side.
Continue to close out the winning side incrementally, i.e. when the market is at 60, close out 10 percent; when it reaches 70, close out another 10 percent; do this again at 80 and 90, finally allowing it to expire with the remaining 10 percent.
Of course, this is a strategy for a trade that you would need to be in before the announcement is made in order to have any potential profit from the movement. Keep in mind that the markets close at 4:15 p.m. and do not reopen until 6:00 p.m.
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