by Joseph Hargett | April 14, 2014 1:32 pm
Earnings season is in full swing, and Internet giants are taking the lead early in the week. Specifically, Wall Street will be focused on current king of search, Google (GOOG, GOOGL), and the former top Internet company, Yahoo (YHOO).
The sector has taken a beating during the past month, with the PowerShares Nasdaq Internet Portfolio ETF (PNQI) falling more than 16% since topping out near $75 in early March. Many investors will be wondering not only if GOOG/GOOGL and YHOO will be able to reverse that trend, but how to trade this duo heading into this week’s reports.
Read on for a closer look and a pair of options trading ideas.
Google earnings will be interesting this time around, as Wall Street digests the post-split earnings per share data on what is likely to be an adjusted scale.
At the beginning of April, Google split into GOOG stock (Class C shares with no voting rights), and GOOGL stock (Class A shares worth one vote each). The move has been speculated as allowing Google to issue Class C shares as a way to finance acquisitions without diluting Google’s control on the voting pool.
The company is expected to report after Wednesday’s bell, and Google earnings estimates are currently at $6.40 per share for the most recent quarter. The brokerage community has slightly higher expectations, however, with EarningsWhisper.com revealing that the whisper number for Google earnings arrives at about $6.64 per share.
Digging deeper, we find that optimism abounds on GOOG stock. Specifically, the equity has attracted 35 “buys” and 11 “holds,” with nary a “sell” rating to be found. That said, the consensus 12-month price target for GOOG stock rests at $670, representing a modest premium of about 23.5% to the stock’s current trading range.
Options traders are also excited about Google’s prospects. For instance, GOOG stock’s April/May put/call open interest ratio of 0.7 indicates that calls easily outnumber puts among options set to expire within the next two months. The most popular call is the out-of-the-money April $570 strike, where 1,098 contracts are currently open. Another 912 calls reside at the out-of-the-money $560 strike.
Click to Enlarge Takings a closer look, implieds on April 18 options are pricing in a relatively tame potential post-earnings move of about 6.4% for GOOG stock. This places the upper bound at $579.76, while the lower bound lies at $510.24.
2 Options Trades for GOOG Stock
Those options traders looking to bet on a rebound in GOOG stock might want to consider a weekly May $540/$575 bull call spread.
At last check, this spread was offered at $16.20, or $1,620 per pair of contracts. Breakeven rests at $556.20, while a maximum profit of $18.80 is possible if GOOG closes at or above $575 when May options expire.
Alternately, if near-the-money GOOG options are just a bit too pricy for your portfolio, a May $500 put sell might be a safe bet of capitalizing on the stock’s staying power and technical support.
At last check, the May 500 put was bid at $6.20, or $620 per contract. The upside to this put sell strategy is that you keep the premium as long as GOOG stock closes above $500 when May options expire. The downside is that should Google stock trade below $500 near or after May options expire, you could be assigned 100 shares for each put sold at a cost of $500 per share. That’s unlikely to happen unless Google really fouls things up, but a warning you should take seriously regardless just because of how pricey that purchase would be.
Next Page: Yahoo (YHOO)
The former king of prime-time Internet, Yahoo (YHOO) will step into the earnings confessional after the close of trading Tuesday night. The consensus is currently looking for a profit of 37 cents per share, though the company’s whisper number arrives 4 cents higher at 41 cents per share.
Opinions appear to be mixed concerning Yahoo stock. For instance, the shares have attracted 15 “buys” compared to 18 “holds.” There are no “sell” ratings. Meanwhile, the 12-month consensus price target of $42 per share rests modest 28% above the stock’s current price range.
Options traders, however, appear less enthused about YHOO stock prospects, especially over the short-term. Specifically, YHOO’s put/call open interest ratio for the April/May series arrives at 0.69, but this ratio rises to a reading of 0.80 in the soon-to-expire monthly April options series.
Drilling down, we find that peak call open interest totals 49,331 contracts at the April $40 strike, while another 45,343 contracts reside at the overhead April $35 strike. Peak put open interest, meanwhile, totals 49,117 contracts at the in-the-money April $35 strike, with another 48,043 contracts open at the April $34 strike.
Click to Enlarge Overall, options traders are expecting a sizable post-earnings move out of YHOO stock, with April implieds forecasting a potential move of about 7.7%. The upper bound for this move lies at $35.54, while the lower bound rests at $30.46. These levels coincide with long-term support at $30, and former support (which may now act as technical resistance) at $35.
YHOO stock is currently oversold, and could be due for a technical bounce. Furthermore, despite struggling ad revenue, Yahoo is still riding high on its 24% stake in Chinese search engine and Internet company Alibaba. Alibaba is looking to eventually launch a public offering in the U.S., and any news of this could provide a considerable boost for YHOO stock.
Options Trade for YHOO Stock
As such, traders looking to position themselves ahead of Yahoo earnings might want to consider a May 32/35 bull call spread.
At last check, this spread was offered at $1.32, or $132 per pair of contracts. Breakeven lies at $33.32, while a maximum profit of $1.68, or $168 per pair of contracts, is possible if YHOO stock closes at or above $35 when May options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
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