2 Volatility Plays for Google’s First-Quarter Earnings

by Joseph Hargett | April 12, 2012 8:31 am

Google lego logo[1]Options traders aren’t expecting much volatility out of Google Inc. (NASDAQ:GOOG[2]) following tonight’s first-quarter earnings report, a development that could favor adventurous speculators. Based on implied volatility for weekly April options, which expire this Friday, traders have priced in a move of about 6.7% for GOOG, below the stock’s average post-earnings move of more than 8%.

What’s more, given the recent influx of call open interest among near-term options, traders appear to be anticipating a rally for GOOG shares. Specifically, the put/call open interest ratio for options expiring in the front three months has fallen from a reading of 0.81 on Friday to 0.74 yesterday. According to data from Schaeffer’s Investment Research, this reading is lower than 61% of all those taken in the past year, pointing toward a call heavy skew among the options crowd.

If Wednesday’s volume is any indication, call open interest should to continue to rise heading into tonight’s report. GOOG saw call volume swell to nearly 62,000 contracts yesterday, compared to put volume of roughly 36,000 contracts. The most popular options on the session were the weekly April 650 call and the weekly April 635 put, which saw volume of 3,145 and 2,324 contracts, respectively. Also among the most-active strikes were the weekly April 630, 635, 670, and 675 calls.

For the record, Wall Street is expecting Google to post a first-quarter profit of $9.64 per share on revenue of $8.1 billion, according to data from FactSet Research. The whisper number rests a bit higher at $9.87 per share. During the past four reporting periods, Google has topped Wall Street’s expectations twice and missed the consensus estimate twice, resulting in an average upside surprise of about 3%.

Options Trading Ideas

Traders looking to speculate directly on Google’s earnings report will likely want to stick with weekly options, as these contracts will be most responsive in the wake of the announcement. With implied volatility questionably below historical norms ahead of the event, one potential approach for traders is to eschew traditional directional plays in favor of those centered on volatility.

For instance, traders expecting a post-earnings move of more than 6.5% from GOOG shares might want to consider a weekly April 635 straddle. Straddles benefit from higher-than-expected volatility, while alleviating the need for the trader to pick a direction for the underlying.

At the close of trading on Wednesday, the weekly April 635 straddle was asked at $41.80, or $4,180 per pair of contracts. Breakeven lies at $676.80 on the upside and $593.20 on the downside, meaning that the position requires a move of about 6.6% – which is below GOOG’s historical post-earnings gyrations.

On the other hand, traders anticipating very little post-earnings movement for GOOG might want to take a look at entering a weekly April 600/675 short strangle. Unlike a straddle, a short strangle position benefits from stagnation in the underlying security. Also unlike a straddle, a short strangle position is also a limited reward/unlimited risk strategy. That said, as long as the underlying closes between the sold strikes on Friday, the trader has nothing to worry about.

At the close of trading on Wednesday, the weekly April 600/675 short strangle was bid at $11, or $1,100 per pair of contracts. As long as GOOG closes between $600 and $675 this Friday, traders entering this position will keep the entire credit. There are two breakeven points for this position at $589 and $686, meaning that the weekly April 600/675 short strangle will lose money outside of these bounds. GOOG would need to move about 7.5% in order to jeopardize this trade.

As of this writing, Joseph Hargett does not own any shares mentioned here. 

  1. [Image]: https://investorplace.com/wp-content/uploads/2012/04/2892487427_0930dd14e4.jpg
  2. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG

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