Daily Stock Market Equity and Options Trading Commentary

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Tuesday, December 9, 2008

Why not do Both?

Recently I have been doing some back testing and I chose Google as my guinea pig... Expensive guinea pig right? Well not really considering I made over 60% in about 2 weeks. A little over 2 weeks ago, November 24 to be exact, I purchased both calls and puts on Google. Knowing how volatile the market currently is, I assumed we'd see Google trade in a huge range for the next 3-4 weeks (at the time the options had 25 days left until it expired). Before you read on, notice that I said the word assumed, a dangerous word in the world of investing, and I could have been left with $0 if my assumption didn't pay off- so don't think I am saying this strategy works 100% of the time!

On Nov. 25 when Google was around 255 share, I purchased the December $240 put, and the December $270 call (notice $15 up and $15 down- I call this a "custom straddle" also known as a strangle - learn more from my advanced trading options E-Book ). I purchased both contracts for $2910, and as of today Google traded up to $318 a share. I sold both my 270 call for $4640 and my 240 put for $125 so together I banked $4765, $1855 of which was profit, that's 63.7% profit to be exact.

So in this case my assumption paid off. Would I have done this if the market was less volatile? ABSOLUTELY NOT! This time it paid off nicely and I've already decided to try this strategy again for the January expiration, once the holidays, and December expiration are over. I will most likely do this as long as the VIX (Volatility Index) is over 50.

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