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By: Costas Bocelli — April 15, 2010

Trade of the Day: The over/under on GOOG is ...

Earnings season kicked into high gear this week.  It’s like the football playoffs to options traders, and the good news is it happens 4 times a year.

Well, the Super Bowl is Thursday, 4:02 pm kickoff, when Google reports earnings after the close.  The thing that makes Google so exciting is April expiration is the next day, Friday.  The options expire in less than 30 hours.

The front month straddle is basically a bet on the magnitude of how far GOOG is going to run on the news.  In fact, GOOG has moved over $100 in one day on a previous earnings report; this stock is capable of flying like a jet airplane.

If you were betting the over/under on a football game, a bookmaker would give you the line.  Let’s say it’s 47.5.  If you take the over, you need the teams to score a combined 48 points or higher.  If you take the under, the final scores must total 47 points or less.

What is the over/under on how far GOOG is going to move on Friday, expiration?

The bookmakers make the lines on pro football.  The Financial Market sets the line on GOOG by old fashioned supply and demand and, of course, some major hedge fund managers who have a strong conviction either way. You can pretty much throw the model out the window on this play.

The “Market” is the Options Market in GOOG.  If you look at the 590 AT THE MONEY Straddle (the combined value of the CALL and its corresponding PUT in April), it is trading hands around 25.50 with GOOG at 594.00.  The market has set the over/under to 25.50 points above 590 and 25.50 points below 590.

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So the over/under is 564.50 – 615.50 

If you like the over, you can buy the straddle for 25.50 (over) and need the stock to finish outside of the market to profit.

If you like the under, you can sell the straddle for 25.50 (under) and need the stock to finish inside the market.

It is early afternoon Thursday, and I am watching the pregame on FOX, I mean CNBC, waiting for kickoff.  I think Maria Bartiromo is singing the National Anthem.   Just to make it friendly, I will paper trade $10; take the under and lay 25.50.

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