Google (GOOG, GOOGL) is playing possum.
Maybe it wants momentum traders to go away. Maybe it wants to prove it has a tamer side. Or maybe it simply needed to take a breather after dazzling traders with a handful of volatile swings.
Regardless of the reason, Google stock finds itself locked in a tight trading range. With GOOGL fixed between $557 and $540 it’s settled into a narrow 3% range for over a month now.
Take a look at GOOGL’s behavior over the past five years, and you’ll find it’s incredibly rare to see prices locked in such close quarters. Which leads us to one of two potential outcomes: Either Google stock has morphed into some staid, old utility stock, or we’re experience a volatility ebb … and things are about to getting uppity in the land of search.
I’m banking on the latter.
To fully appreciate the magnitude of the current volatility squeeze, let’s view the Google stock price with a Bollinger bands overlay. The Bollinger bands are an adaptive volatility envelope that expand and contract depending upon how volatile the stock is. Take note of the pinching of the bands in Google stock over the past month, reflecting its ongoing volatility lull.
Click to Enlarge
In the lower panel, you’ll notice the Bollinger bands’ width has descended to the low end of the range, showing the bands are the tightest they’ve been for the year.
These volatility lulls are almost always an aberration. Google will eventually awaken from its slumber and return to its wild ways.
And I suspect it will happen soon.
Embrace Volatility’s Return With GOOGL Call Spreads
With GOOGL nearing the topside of its range, a bullish breakout appears the most likely. One way to play this is to buy the Jul $555/$565 call spread for $4.50.
The max risk is limited to the initial debit and will be lost if GOOGL sits below $555 at expiration.
The max reward is limited to the distance between strikes minus the net debit, or $5.50, and will be captured if Google stock can rise above $565.
Those seeking more confirmation could wait until GOOGL takes out the $557 resistance level before pulling the trigger.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
