A Look at Google Options Ahead of Next Week's Earnings

Google (GOOG) is due to report earnings next Thursday, July 16th (likely due after the market closes). This is one day before July Options expire on July 17th, so it provides an interesting situation to examine for option traders. This article is for educational purposes only and is not to be considered a specific trade recommendation on GOOG options, I do not have any current positions or recommendations on the shares, and other BigTrends analysts may trade GOOG in either direction before next week's earnings. These are the kinds of techniques and analysis we utilize in BigTrends Advanced Options Strategies advisory service program and in BigTrends ACE Live Coaching.

The following chart shows data captured today from OptionVue regarding GOOG options prices. You can see that with the stock around 409, the July 410 Straddle (which is the Call & Put combined) was priced a bit under 28, which is around a 54% implied volatility. The August options, on the other hand, are only priced around a 37% implied volatility -- this discrepancy can largely be explained by the fact that earnings are due before July Expiration.

GOOG Options Matrix

click to enlarge

The following chart shows GOOG option implied volatility versus the statistical volatility of the underlying shares. The blue line shows option volatility, the brown line is stock volatility (the share price OHLC is overlaid on the chart). You can see the large discrepancy currently, showing that GOOG options are "expensive" right now when compared to how the stock is moving. There was a previous discrepancy in April before GOOG reported earnings, but after earnings this gap was closed due to a relatively quiet reaction in the stock.

GOOG Implied Volatility/Volatility Chart

The following price chart of GOOG shares shows this approximate 28 point range around 410 that the July Straddle is priced at currently. You can see that the shares have remained within this range virtually the entire time since mid-April. You can also see that the 438 area to the upside is near the site of the Top Bollinger and Acceleration Bands (purple and aqua lines, respectively), while the 382 area to the downside gives some cushion should the stock break below its bands. The Percent R readings on this Daily Chart are currently giving somewhat of a Bearish re-test according to our analysis. The bottom indicator on this chart is Bollinger Band Width, which is also another measure of the stock's volatility. You can see that the Bands have been narrowing, indicating a lessening range in the stock recently, but have not yet reached the low levels they did in late-May.

GOOG Daily Chart

If an options trader considered the GOOG July Straddle to be "juicy" in terms of premium and was interested in potentially collecting time premium and decay ahead of next Friday's expiration, there are several methods by which you could attempt to bank on this. Selling the Naked Straddle is not really an option for most individual investors, due to the unlimited risk and very high margin requirements, so other strategies could be looked at. These could include directional July Credit Spreads, July Iron Butterflies "pinned" around a middle level, July Iron Condors banking on a range holding, and Calendar Spreads involving selling July options and buying August options. As always, remember that there is no "risk-free" option strategy in situations such as this -- there remains the possibility of a big gap in the shares in either direction from earnings or other news.

Disclosure: None