Google Call -- An Update

Sep.12.06 | About: Alphabet Inc. (GOOG)

The other day we talked about how the low volatility of Google’s stock in the past 2 months was unsustainable, giving us a good opportunity to pick up some cheap options.

Now that the stock is up $13 in 2 days, it might be a good time to check up on our theory while it’s still in the works.

We got a nice warning sign yesterday that something was up as volume ticked back up over 5M shares (and this is 5M very expensive shares!) on a strong move up. This recent move (in the price change) increases the “implied volatility” of the stock and drives up contract prices—to our benefit since we bought when volatility was low.

The stock has moved to the top end of its August range, and looks ready to test the 200 DMA at $394. A break above that can send us off to the races:

As we noted, 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! So we are playing for a return to volatility with a slight bias to the upside.

Here’s a mid-day check-up as the stock ran up to $390 and the sudden surge creates opportunity to take lightning fast profits! Prices are as of 12:30 per Yahoo's option board, with Google trading at $390:

Safe(ish):

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!).

a. This is what you get for playing it safe, as it looks like we will get called away. Although we stand to make 4.3% for the month, it’s not what we wanted.

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. Again, dull but effective: The $420s shot up to $5.90, and should have been taken off the table, leaving you with the $340 puts for free at $2.25, a 35% on-week target if you quit now, or you can hope for a pre-option pullback. If you are bullish you can sell all the puts and most of the calls to have a free ride on the remaining calls.

i. In comments, we mentioned weighting these positions 3:2 bullish.

Middle Play:

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.

a. The Dec $400s have shot up to $23.20, and the Oct $410s are $8.70, so you have net profit of $3.20 on an $11.30 investment (28%).

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.

a. The $410s are $18.70 (+6.10) and the $350 puts are $3.40 (-1.90) for a net profit of 24%. The Sept $370 puts were wiped out at .25—longer is safer!

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...

a. 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.
b. The $420s hit $15.10 (up $5.40) while the $350 puts dropped to $9.20 for a net profit of $3.60 (17%).

Riskier:

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.

a. This one is of course a home run! The $390s shot up to $3.80 (up 300%) and should immediately be taken off the table to reduce the basis on the Octobers to .90. The Oct $410s are already a double in their own right at $8.60.

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!

a. Well, that one worked a little too fast but its always nice to make 300% in 2 days isn’t it?

We’ll get back to these later but, as I’ve said in Blog comments, if Google breaks below $390 I take these massive 48 hour profits off the table and wait for expirations.

There’s nothing wrong with cash profits—I’m sure we will find something to trade tomorrow!