This guy really nailed it on Google Inc. (NASDAQ:GOOG) at the last earnings report. He said Google would go nowhere and all the option money would evaporate as it flat-lined after earnings. It seemed like a wacky conspiracy theory—are there really people who control a stock to the point where they sell you options prior to earnings and then hold the stock flat in order to let them expire worthless?
He seemed so sure of this that I completely lost interest in Google trading. And it’s a lucky thing, as the stock did exactly that! The usually volatile company went fairly flat (+/- $10) since July 20th, other than a $20 drop in the first 2 days of August (flushing out calls and selling puts one might say).
How unusual is this really? In the past 12 months, Google’s high and low spreads have been as follows (from Businessweek.com):
Shocking isn’t it?
Not only have people apparently lost interest in trading Google, as evidenced by diminishing volume, but the high/low differential of $26.64 (and that was just the 2 days) is matched only by last August’s $26.37. This represents “just” a 7% move in the stock price, lower in fact than last August, because Google was priced 30% lower at the time.
If you throw out the highest monthly move ($84.06 in October of last year), and the lowest ($26.37 last August), we have an average monthly spread of $64—pretty volatile! That means in any given month we can be surprised if Google doesn’t move $30 one way or the other off of the mark.
Holding $26 since earnings then is remarkable!
I believe it was Albert Einstein who said to me “Remarkable is just another word for fixed!”
Come on Phil! We hate to think the markets are rigged—maybe the S&P inclusion caused it to calm down...
Google was added to the S&P on March 31st. Since then, other than last month, the typical high/low spread has been $54— still more than double the last month and a half!
Also, the S&P has run away from Google this month to the tune of 7%, while the Nasdaq has flown 10% away from Google:
And if that’s not enough to keep you up at night (or is it just me), take a look at this absolutely shocking comparison between Google and fellow S&P techies Yahoo! Inc. (NASDAQ:YHOO) and eBay Inc. (NASDAQ:EBAY):
There is a fairly good correlation between volume and volatility on this stock (and most), so let’s keep an eye on the volume levels next week to see if we will be breaking into a new movement cycle.
Think I might be on to something now?
OK, enough chit chat—let’s make some money!
We called the bottom on Google at $375
You can buy some Google and hope it goes up (yawn), or we can gamble that either volatility or gravity will reassert itself and play some options.
As that very insightful July article on Google stated, their earnings performance was exceptional and we have been given no indication that it will not continue to be so in the future. Given the stock is underperforming its peers by 20% in the past 30 days and underperforming the indices by 10% (including the S&P, in which it is the 19th largest component), my bias will have to be to the long side...
There are several ways to play this so choose your favorite level of aggression and please remember that you can very easily lose all your money in stocks and options so use caution and get the advice of your broker, etc...
A) Buy the stock for $378 and sell the outrageously expensive Oct $380s for $15.40. This reduces your basis to $363. You can roll the calls if the stock trades down, or take advantage of dips to buy out the caller and resell as it moves up (this is what the big boys are doing to you!).
B) Play for the comeback of volatility ($40) by taking a spread of the Oct $420s for $2.95 and the Oct $340 puts for $3.50.
A) Assume they will have trouble breaking $400 and take the December $400s for $16 and sell the October $410s for $4.70. Again you can roll, or buy out on dips.
B) Take the December $410s for $12.60 and cover with the Oct $350 puts for $5.30 or the Sept $370 puts for $2.90 and roll into October if you have to.
C) Split the December $420s for $9.70 with the Dec $350 puts at $11. You have 3 months in which a $40 move either way will put you in the money...
In a play like this, if I go in the money early, I like to reduce my holdings so I have just the profits remaining so either way I win.
I think Google may break any day, especially if we have a strong market next week, so I’m going to make a short-term play, even though I am likely to lose both ends of this bet:
A) Take the September $390s for $.95 and the Oct $410s for $4.70 with the hope of selling the Septembers ASAP to reduce my basis on the Octobers.
Can be covered with Oct $330 puts for $2.30 until you are comfortable with direction.
B) Take a 1/10 (of what you are willing to risk) position on the Sept $390s for .95. If that doesn’t work, by expiration, take a 2/10 position on the Octobers that are $30 out of the money, followed by a 4/10 position in the Januarys that are $30 out of the money at the close of November contracts. If the stock is still flat on 19th, be glad you still have your 30% and go home!
The 30% is reserved for rolling your position when you get near the money; always, always take profits off the table!
The same trades can be done on the put side if you are bearish. Earnings should come out right around October options' expiration time, and we can expect premiums to rise between now and then (minus time value, of course).
I am in no way suggesting it is a good idea to go right out and pay these prices, as my general practice is to wait for the stock to go the opposite direction and (as long as nothing new has happened to change my thinking), try to pick up a bargain in the opposite direction.
I will also be looking for daily volume to trend back towards 6m shares otherwise, we may not have enough fuel for the volatility we are looking for to make this trade happen.
We will be tracking and discussing these positions in my daily column so stay tuned for more fun!