GOOG Volatility Is Making Options Silly-Cheap

by Tyler Craig | July 25, 2013 10:47 am

Amid the Google (GOOG[1]) earnings fallout and subsequent rapid rebound, implied volatility has taken a nosedive into previously unseen territory. And you know what that means — options are priced on the cheap right now.

And unless the king of search is entering some type of new low-volatility regime where its day-to-day price movements drop dramatically, it’s a good bet its options won’t stay this cheap for long.

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As shown in the accompanying volatility chart, the 60-day IV (which essentially reflects the price of two-month options) has recently fallen to 17%, its lowest level in more than two years. In light of volatility’s undying tendency to mean-revert, it’s not difficult to bet IV will head higher sometime in the coming months.

The main task at hand, then, is deciding how to best position ourselves to profit from the relative cheapness of GOOG options. As is usually the case in the derivatives supermarket, choices abound.

Bulls might consider simply buying the Sep 895 call option. The lower price tag reduces the capital outlay required which, in turn, decreases the maximum risk. Plus, any type of rebound in implied volatility should boost the value of the call option.

The same advantages present themselves to bears if they buy the Sept 895 put option.

If you find yourself lacking a strong directional bias on this tech innovator, but do agree that options are simply too cheap, you could purchase a straddle by buying the Sept 895 call and the Sept 895 put for around $47.50. Sure, $47.50 might appear kind of expensive to those used to employing option strategies for a few hundred bucks, but such is life when you’re dabbling with a $900 stock like Google.

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At $47.50, the straddle is actually only pricing in about a 5% move for the next two months. I suspect there’s a very good chance GOOG rises or falls by more than this amount at some point. The accompanying chart displays the expiration profit and loss zones.

You might recall there was a similar setup that presented itself[2] in Apple (AAPL[3]) last month in which a long straddle trade was suggested. Fortunately, AAPL didn’t disappoint, and a large down move helped the suggested straddle double in value.

Let’s hope Google can deliver something similar.

As of this writing, Tyler Craig held bullish positions in AAPL.

  1. GOOG:
  2. similar setup that presented itself:
  3. AAPL:

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