Three Potent Tech Options Plays

After the breathtaking rally in GoogleGOOG after last week's earnings report, traders' eyes are shifting to three big names -- AppleAAPL, AmazonAMZN and BaiduBIDU that all report earnings this week, hoping that lighting may strike twice.

Great Expectations

Google's 20% move certainly ups the ante for expectations of a large price move following these companies' earnings reports. The implied volatility of Google options had been pricing in about a 7% price move for Google. In retrospect, this was somewhat low relative to the fact that the historical volatility had been rising in preceding weeks and was basically at par with the implied volatility. It's somewhat unusual for IV to be equal to the HV, especially before an earnings report. Click here to see a graphic representation. In retrospect, regardless of your directional bias, buying premium in Google ahead of earnings, simply on the basis of relative value, made sense.

Get Bearish on Baidu With Options

Volatility Rising

This may not be true for the three names mentioned above. Aside from the fact that all have now enjoyed large price move in the past week, something that Google did not experience before its earnings, the implied volatility of their options has been ratcheting higher. As author of TheStreet.com Options Alerts, I keep my eye out for these sorts of opportunities, so let's take a look at today and tomorrow's tech reports and some option plays on them.

For Amazon, which reports earnings on April 23, the stock has gained 8% in the past week, and implied volatility has increased to 65% or a 12 percentage point premium to the historical volatility. Click here for a graphic. With an 11% price move now priced in, buying option premium or being long gamma does not seem too attractive. I'd rather look at selling a strangle or better yet limiting risk by using an iron condor, which consists of selling both a call spread and put spread, each for a net credit.

For example, with Amazon currently trading at $80 a share, one can sell the May $85 calls and buy the May $90 calls for a credit of $1.60 for this bearish call spread. Couple this with selling the $75/$70 put spread for a net credit of $1.80, and one will be collecting $3.40 in premium.