One with investment capacity of around $15000 (in cash or in shares as margin) for 8 days can sell 1 lot (100 shares) of Google (US:GOOG) 970 Call option expiring on 20th July at current market premium of $2.50 to generate a return of 1.6% on $15000 in 12 days, assuming a brokerage of $10.
The rationale behind the trade:
1. The stock at current market price of $894 is around 8.5% away from 970 and seems quite difficult given the run up in the stock since 25th June, 12 days to expiry and fat size of $300 billion market value.
2. At the current market price the stock is trading at expensive valuations of around 20 times forward year earnings.
3. 52 week high for the stock is $920 which could act as strong resistance for the stock in near term (at least till expiry).
Note: Since this is a naked call strategy if google stock closes above $972.5 on 20th July, there will be a loss of $100 on every dollar rise beyond $972.5.
However if one wants to hedge the risk of unlimited loss, which seems quite remote in this case, he/she can buy $1000 call at current premium of $0.50 which requires an additional investment of $50. By taking this protection the maximum loss in case google moves past $1000 would be $2800.
As expected Google fell after result and the call option expired worthless. The results fell short of expectations and high valuations made the stock crack to as low as $880 after result.
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