Phil Davis submits: This is not how it's supposed to happen! Usually you can make a play like this once, maybe the second time for a little less profit but this is now officially just silly! Once again Google Inc. (NASDAQ:GOOG) has rocketed on us and we find ourselves with some very profitable positions.
As a disclaimer, I got nervous and cashed most of mine out (as I mentioned in the blog during the week) in a fit of general market bearishness, but I am loving this YouTube deal if it goes through, and can only hope that people sell Google off on the news to give me another entry point!
Bambi Francisco wrote an excellent article outlining the risks involved, but here's my take on the deal:
I don't think Google would be doing this deal if they didn't have a handle on the copyright issues. Either they think they already have the legal rights, or they have some compromise in mind, say limiting TV and Film content to 3 minutes. Media outlets pay to have someone see a 3 minute clip of their stuff!
Fair use of a song or radio clip is 30 seconds, or 20% of a 3 min song. That works out to 4.4 minutes on a half hour show (22 minutes of content), so I think, if push came to shove in the courts, that's where we'd end up.
According to Wikipedia:
"Brief song clips (under 30 seconds) may be used for identification of a musical style, group, or iconic piece of music when accompanied by critical or historical commentary and when attributed to the copyright holder."
There is no firm ruling yet for video clips but, if I were running YouTube, I would make a deal with the major content providers that included adding a link to a full content version a-la ITunes for a nice little revenue stream.
Another nice little revenue stream YouTube could pick up is advertising! As any blogger knows, just 100 page views a day can get you 2 bucks from Google's AdSense program, and we know YouTube gets 100,000,000 downloads a day. Even if you were to assume that each person only looked at the page they were downloading from (highly unlikely) that's $730M a year in revenues!
While Google may have floated an offer to YouTube last week, it is very possible that the reason the company has been seeing the webbies is to negotiate the best possible deal for who they ultimately go with as an advertiser.
Mike Moritz is no fool; with 34M unique visitors a day, this company is worth a lot more than $1.6B! On Thursday night at 9pm the country's top 1 and 2 shows, CSI and Grey's Anatomy, draw a combined audience of 47M, with each show bringing in 23M and change. Survivor has 17M viewers... Now what do you think year-old YouTube is worth?
Google can only hope that Microsoft Corp. (NASDAQ:MSFT) will once again fall victim to its own hubris as I'm sure somebody in Redmond is assuring Steve Ballmer that they will have a better, faster, stronger version of YouTube ready by July.
If not, and if Google can't seal the deal this weekend, prepare for one major bidding battle! eBay Inc. (NASDAQ:EBAY) bought Skype for $2.6B PLUS performance based considerations, and Skype has 54M total members after 5 years of operations.
While that may have been a tough pill to swallow for $40B eBay, I think $127B Google will have a very easy time justifying an acquisition that fits their model like a glove!
What? Oh yes, the Google trades -- almost forgot about those, just imagining all those amazing YouTube possibilities...
I last updated this post on 9/24, and it's been a rocky 10 days, but this was an earnings play, and if you were the type to just buy-and-hold you did a lot better than I did on these positions.
The most important thing is to examine the strategy we used, making sure the original logic that started this string of posts, way back on September 11th, when we first identified this opportunity.
Officially, this is our third-round of Google plays, and I really hate to push my luck, so I strongly recommend taking half off the table, just to be safe. But, then again, I said that last time and look what I missed!
As usual, we had three categories of plays, based on risk tolerance levels and let's see how they panned out:
The Safe(ish) Play:
A) Buy the stock for $397 and sell the outrageously expensive Oct $400s for $17 This reduces your basis to $380. 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!).
With only a $5 drop since our entry here, there was never a good time to buy out the caller, and it looks like we will get called away here with $20 in our pocket. 5% for the month is safe and boring, but that was kind of the point.
If you rolled this from a prior trade your basis is just $346, very nice indeed!
A) Assume they will have trouble breaking $420 and take the December $420s for $17.30 and sell the October $430s for $5.70. Again you can roll, or buy out on dips.
The Dec $420s have shot up to $27.50 (up 69%), and the Oct $430s are $10.30 (up 81%). Since the $430s still carry a high premium, your best bet is to ride them out, as a close under $430 on the 20th saves you $5, but perhaps stop out of the trade if your calls dip below $25 to preserve a 50% profit trade.
B) Take the December $420s for $17.30 and cover with the Oct $380 puts when they get back to $5.50 or less
So we have the $10.20 gain (69%) on the Decembers while the Oct $380 puts came all the way down to $2.60 (down 55%) for a net gain of $7.30 (32%).
C) Split the December $440s for $11.40 with the Dec $360 puts at $10.30. 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.
This is improving nicely: The Dec $440s are up $11.10 at $22.50 while the Dec $360 puts are down $5 to $5.30. I made a mistake here by not picking lower entries as, even a day later, the $440s were as low at $10.40 while the $360 puts were as low as $7.80 on Thursday. So far, up $6.10 (28%).
This is a great example of the value of reading the comment section as the difference between the print article and our actual entry point was close to 10%. Of course, this is a long bet on a big earnings move so hopefully, like our last round, we won't be sweating the early wiggles!
I think Google is oversold atm -- and, with earnings coming up, anything can happen:
A) Take the October $430s for $5.30 and the Nov $450s for $5.50 with the hope of selling the Octobers ASAP to reduce my basis on the Novembers.
Don't be greedy! That's the point of rolling profits -- to protect yourself! The $430s should be coming off the table at $10.30 (up 94%) and, personally, I would set a pretty tight stop on the Nov $450 at $10.30 (up 87%), as this is just a heck of a lot of money to make on one trade!
Keep in perspective that Google is now up $43 (10%) from our original trade, and sitting at psychological resistance at $420: the (July high was $427). If they close the YouTube deal, there may be a sell-off on the huge expense -- which I will take as another buying opportunity -- so stay tuned!
B) Take a 1/10 (of what you are willing to risk) position on the $420s for $8.10. If that doesn't work, by expiration, take a 2/10 position on the Novembers 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!
Once again fortune favors the bold as the $420s are $14 (up 73%)! If you held it this long -- which took some guts! Keep in mind that the premium will cost you $1 every day from now to the 20th, so don't try to be a hero with this one.
We'll follow up again next week, but let's be careful out there as we move into earnings (pm I think) on the 19th! You can catch the daily action at: http://philstocks.blogspot.com/
Now that we are so close to earnings I am leery about any October positions, but I will post something on Monday on the main site after we see how this deal shakes out.
In our last post I said: "Let's keep an eye on Yahoo! Inc. (NASDAQ:YHOO) but, more importantly, Time Warner Inc. (NYSE:TWX) and Microsoft Corp. (MSFT), our other on-line rivals. A drop back to $399.50 is nothing more than a healthy 50% retracement of last week's $37 run!"
I hit that number on the head as well as the $420 top so far, but predictions are now very murky with YouTube further complicating the upcoming earning report!
We also have 3 Yahoo positions we are very happy with if Google keeps going up:
- Nov $25 calls at $1.80 (up 29% from our 9/28 pick)
- Jan $27.50s for $1.50 (up 20% from our 9/21 selection -- where we sold and then profitably rebought calls against them).
- Jan '08 $27.50s for $5.20 (down 20%, even after canceling our caller -- who had it much worst than us).
Yet another Disclaimer: You should never make real money plays of any kind without consulting your broker, as this is very dangerous. Past performance is in no way an indication of future performance and our current positions are listed here.
Read all of Phil Davis's articles on Seeking Alpha.