Getting Ready For Google

April 17, 2008 at 11:38 am  ·  Category: Market Commentary, Options, Sentiment Analysis, Stocks

With no clear indication of which way revenues are trending, this is a tough quarter to trade.

– Jason Helfstein, Analyst, Oppenheimer

The uncertainty surrounding Google’s forthcoming 1st quarter earnings report is incredible.  Are they going to meet?  Will they miss again?  With the stock as beat up as it is, will it react well to even a mediocre report?  Will it tank in response to a bad one?

The Wall Street Journal ran a headlining article in its Marketplace section today titled “Has Economy Hurt Google Search Ads?  First Period Net, Out Today, Will Show Whether Worries Affecting Stock Are Justified” (subscription required) (The Wall Street Journal, Thursday April 17, B1).

Consider the options market:

  • About 92,000 April08 options contracts on Google stock traded hands through 11:00am PST, according to Scottrade.  About half were puts and half were calls
  • The at the money April08 $450 calls are trading hands for about $15.  The at the money April08 $450 puts are trading hands for about $14
  • The same kind of price parity exists as you move to the in the money April08 $440 and $430 calls and the April08 $460 and $470 puts.

In other words, the options market suggests investors are pretty much evenly split between an up and down move in Google’s stock following its earnings report with the expected move about 3.5% in either direction.

There are a couple of ways you can play this.

The most conservative is to just take a wait and see attitude.  A gap down at the open tomorrow would represent capitulation and a huge buying opportunity in my mind.  So you could wait on that.

The alternative is to bet on action.  That is, you buy both the April $450 puts and calls for a combined price of about $30 – this is called a straddle.  You then need a move either above $480 or below $420 to make money.  That’s a big move, something on the order of 6-7% – just to break even.  Therefore, this is a very high risk trade.

But I wouldn’t be surprised to see such a big move given all the uncertainty and anxiety and hope surrounding Google’s stock.  In fact, after Google reported 4th quarter earnings on January 31st, the stock moved down 8.5% the next day.

Disclosure: Top Gun has no position in Google stock or options, but I am personally long the above straddle.

Posted by Greg Feirman  ·  Trackback URL  ·  Link
 

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