Google (GOOG) has been on quite a tear for the past year, with its stock hitting new all-time highs almost every day - including its most recent on Monday at $765. This price saw the search engine giant reach a monumental milestone as a public company. It usurped Microsoft (MSFT) by taking its place as the second-largest stock on the Nasdaq 100 index. Its market cap of $249 billion now makes it second to Apple's (AAPL) $618 billion.
With this kind of soaring price gain, some have found themselves in a quandary, wondering if it's a good time to buy Google. If you can't afford Google but have the appetite to take on more risk than you do with just trading stocks, you may consider the options market.
Buying calls is an options strategy that could be particularly fruitful now as Google is due to report its third quarter earnings on Oct. 10. Even better may be the straddling options strategy.
Before I point out the specifics on how straddling works, I'll point out why I am bullish on Google. It directly relates to the revenue the search engine giant derives from its ad display business. I am most impressed by the gains Google continues to make, especially considering the competition coming from Facebook (FB). In fact, Facebook managed to knock Google from the top spot in terms of market share in 2009, according to stats from eMarketer. Google regained the top spot from Facebook in 2010, only to lose it again in 2011 to the social networking site. While I don't see them as being a threat to Google at this point, I think the other companies that make up the top five in terms of market share for display advertising must also be acknowledged: Yahoo (YHOO) is third, Microsoft is fourth, and AOL (AOL) brings up the rear at five.
The advertising space is incredibly competitive as companies are determined to carve out as much market share as possible to continue to increase their revenue. Google experienced this firsthand when newcomer Facebook was able to take the most market share from it. Regardless of all the rage in the news over smartphones, tablets and other issues in the mobile space, these companies thrive on their abilities to attract and retain advertisers.
For now, Google seems to be answering the call. For 2012, Google is expected to generate net display-ad revenue of $2.31 billion, or 15.4% of the total U.S. market. eMarketer revised downward its estimate for Facebook to $2.16 billion, which would give it a market share of 14.4%.
Since Google's second quarter earnings report, the stock is up 19.5%. For the second quarter, Google reported revenue of $10.96 billion, or 90% of consolidated revenue (the other 10% from Motorola Mobility legacy business), representing a 21% increase over second quarter 2011 revenue of $9.03 billion. GAAP earnings per share were $8.42, compared to $7.68 in the second quarter of 2011. Non-GAAP EPS in the second quarter was $10.12, compared to $8.74 in the second quarter of 2011.
Consensus estimates for Google's third quarter earnings per share is $10.57, which I think it will easily meet. Again, I base my belief on the strong revenue the company continues to generate from its ad business.
With all that being said, I'll point you to some recent options action for Google. One of the strategies that you may consider because it is often used ahead of a company's earnings report is the straddle. This entails buying a call and put with the same price and the same expiration date of Oct. 19. This method can help you to hedge the risk over whether or not the stock will be higher or lower than the striking price at the time of the expiration date.
Even better is to have long positions in your call and put options, which can maximize the potential that the straddle will have large profits even if the underlying stock price tanks.
As I've pointed out in other articles about straddling, one of the reasons the strategy is so popular among investors during earnings seasons is because a company's earnings announcement can create volatility in the market. If the company beats analysts' estimates, which I expect Google to do, the company's stock may enjoy gains as investors flock to it to take advantage of the company's growth.
For the option contracts with strike prices above $750 and Oct. 19 expirations, there is far more interest for the calls than there is for the puts. For example, at the time of writing, the October 750 call had an open interest of almost 4,000, and the volume traded was about 2,200. Some investors are looking for Google to be trading at $800 by Oct. 19, with open interest for those calls at just under 20,000. The volume traded for those, however, was just 724.
For the October 750 call, the price was $27.30 and it was $6.80 for the October 800 call. The October 750 put was $22.20 and the October 800 put was $51.80.