Mon Apr 10, 2006: Buying GOOG Put Options

The purpose of today's commentary is to show how the table data can be used to compare buying put options at various strike prices.

Two months ago we looked at buying GOOG call options and they rallied from about 17 to 55 in just two weeks. That was lucky.

Today I'd like to give an example of buying put options on GOOG stock because the stock has now recovered almost 60% of its sell-off from earlier this year. GOOG dropped from a closing high of 475.11 to a low of 337.06 before bouncing back to today's closing price of 416.38.

Looking at it another way, the 79.32 point rally is a 23.53% retracement off its low price.

Again, this will not be a recommendation, just an example. There's no guarantee the stock will go down. It could go up, or stay about the same. Buying options is always highly speculative, especially when there isn't much time before they expire. But just for fun let's consider how far the stock would have to drop to double our money buying put options.

Looking at the April puts, you can see that the options with the highest "double" price are the 420 puts, which would double your money if the stock falls to 388 by expiration Friday April 21. The stock would have to fall to at least 404 to break even, due to the premium you would be paying as an option buyer. These put options cost $1,600 per contract to control 100 shares of stock.

The reason they would double at 388 is that they would be in-the-money by (420 - 388) = 32 which would be worth $3,200.

The May puts with the highest "double" price are also the 420 puts, which would double your money if the stock falls to 373.40 by expiration Friday May 19. The stock would have to fall to at least 396.70 to break even. The price for these May 420 puts is currently $2,330 per contract.

Which would be better to buy?

That depends on how fast you expect the stock to drop.

My own preference would be for the May puts, because they would give me six weeks of time before expiration instead of two, even though they cost more and require a larger drop to match the theoretical payoff of the April puts.

In any case, only experienced option speculators who can afford to lose their entire investment in a short period of time should be involved in this risky strategy at all. Google stock has bounced back into a strong uptrend now and there's no guarantee it will turn around anytime soon.

Best of luck with your option investments!