Internet search giant Google Inc (NASDAQ:GOOGL, NASDAQ:GOOG) is going to have the lion’s share of investors’ collective eyeballs next Thursday night as it reports its Q1 earnings. And if history repeats itself, traders can profit in from the report by positioning in Google, using instead a GOOGL bear call spread.
If recent history is any indicator, Google’s upcoming earnings will produce or reveal a couple items to investors. First, given five consecutive quarters of not meeting earnings estimates, we’ll side with the laws of physics. The expectation is the ‘light’ earnings trend that’s now in motion, stays in motion or continues to persist for Google stock.
Despite sounding bearish, not meeting bottom-line analyst views hasn’t necessarily hurt GOOGL’s stock performance in the past. In fact, shares of GOOGL have traded higher in three of the last five earnings events while announcing earnings shortfalls in every single period.
To our second point though, if the past year’s price chart has forecasting merit, GOOGL’s technical trend in front of its quarterly releases has a history of staying in motion after the company announces results. And right now the trend looks pointed lower in Google stock.
Additionally, it will be that InvestorPlace’s Louis Navellier, through his Navellier Ratings service, has slapped a “sell” rating on GOOGL and grade of “D.” You don’t have to do a Google search to know that at a minimum, a warning for would-be bullish investors in Google stock has been issued.
GOOGL Trading Chart
Referencing the GOOGL weekly trading chart above, I’ve drawn in a down channel formed from Google stock’s three lower highs and two lower lows. Given GOOGL’s tendency to follow the existing weekly chart trend after announcing earnings results (blue triangles); the expectation is for Google stock to move lower.
Further, recent failure at channel resistance and a daily chart bear flag below Google stock’s 50-day simple moving average resistance (not shown) within the larger weekly downtrend look to support traders willing to place bearish positions into the report.
The brown and blue lines below the price action in our trading chart show Google stock’s underlying or stock volatility and implied volatility. The latter reflects how traders are pricing call and put prices in Google options.
In the actual or more aptly these days, Google options’ virtual trading pit; the April 24 weekly calls are the purest earnings “all or nothing” play and priced around 34% implied volatility compared to Google stock volatility of about 17% or 18%.
The options math behind this reading has traders pricing in a 68% chance Google stock will remain within a range of about $510 to $570 through next Friday. The GOOGL averaged out, at-the-money straddle and strangle breakeven levels of roughly $515-$565 support the Google options volatility estimate.
GOOGL Earnings Bear Call Vertical
In visually interpreting GOOGL’s volatility history, implieds are at modestly elevated levels and near the highs of two of the last four events. As relevant, if not more important, with earnings reactions always able to produce tracking error in our well-intentioned analysis; searching for a vertical spread to reduce risk in positioning bearishly for Google stock earnings, fits the situation at hand.
Checking the board, the GOOGL May $580/$585 bear call sets up for 60 cents with slightly worse than mid-market pricing. This GOOGL spread will capture the full credit if shares remain below the sold $580 strike. That’s attractive as the potential to collect the premium is beyond the one standard deviation range in Google stock dictated by the weeklys implied pricing.
Confirming the odds for this alternative, bearish Google stock position, we can also use May volatility levels. Calculating the expected standard deviation on May implieds of 23% and 32 days to expiration, shares of GOOGL are still likely to remain below $577 applying the same calculation.
Volatility estimates for how a stock should move over a certain period don’t take into consideration our view of Google stock’s bearish chart and historical earnings-related tendencies which may continue to exist. Some may scoff at the idea, but we appreciate this type of extra confirmation can further increase the likelihood of profitability with this GOOGL bear call spread.
If, however, our reinforced odds still fail to contain Google stock; there is some unequivocal certainty with this GOOGL bear call spread. The maximum risk is 100% set at $4.40 per spread above $585 at expiration. That’s nice insurance to have in place for earnings. And should that low probability occurrence still transpire, there’s a very strong chance traders’ can drastically reduce that maximum risk exposure at some point, prior to the third Friday in May.
As of this writing, investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon his observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual.
More From InvestorPlace
- 7 Index Funds to Buy for Retirement Investors
- Dump Zillow Before Bad Turns to Worse
- What’s In an Alcatel Deal for Nokia Stock?