Internet behemoth Google (GOOG) is on deck to release its second-quarter earnings report after today’s close, and the company’s performance might well dictate whether the stock will eclipse the much-discussed $1,000 level. The technical hurdle has taken on a life of its own recently, with analysts boosting their price targets skyward, projecting that GOOG is destined to trade in quadruple digits.
But the window for Google $1k is narrowing quickly.
Last month, the company cleared a final hurdle in its bid for a stock split, settling a shareholder legal suit. The split is expected to cut GOOG’s price nearly in half because it will roughly double the number of outstanding shares. Because of this, there is a bit more euphoria from both the analyst and investing crowds heading into tonight’s quarterly report.
For the record, Wall Street is expecting a profit of $10.78 per share on revenue of $14.4 billion, up from earnings of $10.12 per share on revenue of $9.61 billion last year. That said, Google’s second-quarter whisper number arrives considerably higher at $11.09 per share, according to EarningsWhisper.com
Additional bullish sentiment can be found in brokerage ratings. For instance, GOOG has attracted 28 “buy” or better analyst ratings, compared to 12 “holds” and no “sell” ratings. Furthermore, the recent price-target increases to $1,000-plus per share have pushed the consensus 12-month price target to $998. GOOG closed yesterday at $918.55.
Options traders aren’t buying into the hype, however. In the July and August series, there are 90,443 open call contracts, compared to 86,927 open put contracts. The result is a middle-of-the-road put/call open interest ratio of 0.96. Given the wealth of Google bulls on Wall Street — and that calls are typically more popular ahead of an earnings event — this indicator of options activity points toward unexpected caution among short-term traders.
Some points of interest in this options backdrop include peak call open interest of 4,080 contracts at the out-of-the-money July 950 strike, 3,790 calls at the July 975 strike, and 3,446 calls at the July 930 strike. On the put side, peak open interest rests at the July 880 strike, totaling 5,239 contracts, followed closely by the July 850 strike, with open interest of 4,087 contracts. Keep in mind that these July options expire at the end of this week, making any new activity today highly speculative in nature.
Click to Enlarge Overall, July options implieds are pricing in a post-earnings move of about 4.5%. Such a reaction places the potential upper bound at $961.30, and the lower bound near $878.70. Overlaying this with GOOG’s technical chart places the potential bottom well below the stock’s 50-day moving average, which has held firm as support since mid-April. Meanwhile, a move above $930 sends GOOG to fresh all-time high territory, while a break above $950 could signal that the stock has a rocket to $1,000 and above.
For those options traders looking to bet on an upside breakout for GOOG, an August 920/950 bull call spread has a very good shot at hitting a double.
At the close of trading yesterday, the spread was offered at $12.70, or $1,270 per pair of contracts. Breakeven rests at $932.70, while a maximum profit of $17.30 is possible if GOOG closes at or above $950 when August options expire.
If the bullish hype surrounding GOOG makes you a bit nervous, or if near-the-money GOOG options are just a bit too pricey for your portfolio, an August 800 put sell might be a safe bet of capitalizing on the stock’s staying power and technical support.
After the close last night, the August 800 put was last bid at $1.20, or $120 per contract. The upside to this put sell strategy is that you keep the premium as long as GOOG closes above $800 when August options expire. The downside is that should GOOG trade sharply below $800 near or after August options expire, you could be assigned 100 shares for each August 800 put sold at a cost of $800 per share — an event extremely unlikely to happen unless Google really fouls things up later tonight.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.