The following metrics are based on buying weekly October 20th options and just playing the earnings announcement only. Buying  October 27 or September options and allowing a trend to run will give you more time for this trade to work out. But this post is for explaining option plays through earnings.

(I will be rounding the option pricing for the sake of simplicity).

For this post I will be using $755 as the Google stock price at the time of opening the option trade in my examples as you read this the price may have moved.

The Google at the money weekly Oct 20th calls and puts at the $755 strike  are priced at $20 each, this reflects the pure value of volatility priced in for the after earnings move. This implied volatility pricing suggests a $735-$775 price range after earnings are announced. New option traders need to understand that this $20 pure premium with the at the money options will be removed by Friday morning after the earnings announcement. To be on the winning side of this trade the buyer will need the move to be great enough into intrinsic value (over $20) to overcome the costs of the vega.

Sellers of an at the money short option straddle will take in $40 in premiums between the call and put side and will need the stock to move less than $40 in either direction to be profitable.

The seller of a short option strangle selling a $775 call and a $735 put would take in $20 in premium. If the stock moves less than $40 in either direction the seller will be profitable.

A buyer of a $775 call/$735 put strangle will need the stock to move $40 just to break even.

A directional trader who buys a call or a put will need a greater than $20 move for this to be a profitable trade.

It is crucial for new option traders to understand implied volatility in option pricing and when this premium will be removed. Also, the options market is very efficient in pricing and most moves are priced in accurately so it is difficult to make money buying options long with out the added edge of trend following, technical analysis, and pattern recognition.

(I am flat, no positions in Google currently).

By Steve Burns

After a lifelong fascination with financial markets, Steve began investing in 1993 and trading his accounts in 1995. It was love at first trade. After more than 30 successful years in the markets, Steve now dedicates his time to helping traders improve their psychology and profitability. New Trader U offers an extensive blog resource with more than 4,000 original articles, online courses, and best-selling books covering various topics.