Trade Update Oct. 15th, 2012: Since initiating a bearish Put Fly for Oct expiration on Sept 21st, GOOG rallied almost 5.5% to make a new all time high on Oct 5th, the very day that the SPX made new 4 year highs. GOOG, and the SPX have since retreated, while the SPX has given back almost 3% in the last 3 weeks, GOOG has retreated almost all of the 5.5% gains in the same period.
For the first time in weeks, GOOG is starting to show some relative weakness. But at this point I am starting to feel like Christmas came early on this trade as it was immediately against me, and I was wrong out of the gate, so prudence is warranted in my humble opinion. I am now going to take a small profit, close the position and look for a better re-entry point as I take a closer look at their Q3 earnings report due Oct 18th after the close.
Action: GOOG ($734) Sold to Close Oct 715/680/645 Put Fly at 6.00 for a 1.00 gain.
** The screens are wide as this is a multi-legged trade, I used a near mid market limit and got filled, NEVER USE MARKET ORDERS IN MULTI-LEG TRADES LIKE FLYS.
Original Post Sept 21st, 2012: New Trade GOOG: AAPL’s New iOS Leaves GOOG Searching for Answers in Mobile
Here is a preview of the trade that I will be discussing tonight on Options Action on CNBC at 5pm:
GOOG has very quietly, without a whole heck of a lot of news made new 52 week highs, quickly approaching the all time closing of $741.79 from back in Nov 2007. The stock has had a monster run of late, up 30% since early June and now up 13.75% ytd, but still under-performing the SPX up about 16.6% and the Nasdaq up 22.6%.
When compared to its arch rival AAPL, GOOG as a stock is treated like a red-headed step child when you consider the company’s rock solid balance sheet (18% of market cap in cash), expected earnings growth at about 17% for the next 2 years, and very reasonable valuation, 12x ex-cash, which is basically inline with AAPL for 2013.
Here is the thing, GOOG more than AAPL, or even FB appears to be the one playing catch up in many areas of Mobile search. Make no mistake about it, AAPL and FB are likely to get cosier as the IOS / Android wars heat up. Obviously GOOG has enjoyed the very poor reviews of AAPL’s new Maps App in the iOS for the new iPhone and iPad which in some ways softens the blows of it getting booted off the platform, but AAPL will win this battle and now emboldened by their recent patent victory over Samsung they are very likely to turn their sights squarely on Android. In late August there were media reports that both AAPL and GOOG CEOs held high level patent discussions to avoid costly litigation (read here), my sense this was a bit of a trial balloon and will likely get much worse before it gets better.
I guess a major argument of the GOOG bear thesis is that with GOOG maps out of iOS devices, GOOG’s costs associated with accessing iOS search queries will go up massively and given AAPL’s increasingly dominant position in Tablets and as evidenced by AAPL’s iPhone 5 launch today, this may be the start of a massive headwind for GOOG in mobile search.
Near term I think GOOG has run too far too fast and want to look for a low premium way to get some short exposure to GOOG in Oct in front of what could be an important Q3 earnings report that should fall in Oct expiration.
TRADE: GOOG ($734.50) Bought Oct 715/680/645 Put Butterfly for 5.00
-Bought 1 Oct 715 Put for 14.4
-Sold 2 Oct 680 Puts for a total of 11.40 (5.70 each)
-Bought 1 Oct 645 Put for 2.00
Break-Even on Oct Expiration:
-Profits btwn 710 and 680, make up to 30.00, max gain of 30.00 at 680, profit trails off btwn 680 and 650.
-Losses of up to 5.00 btwn 710 and 715 and btwn 650 and 645, max loss of 5.00 above 715 and below 645
TRADE RATIONALE: With the stock up here, we are likely to see it at least make new highs in the days/weeks to come, I am going to leg into this one, a bit, and put on about a half position, I don’t see the stock running away prior to earnings, but I like the risk/reward of leaning on the 680 level which was the last spot at which it based prior to the recent run.
Oct options are already implying about a 5% move vs the 4 qtr avg of about 5.75%.
The strikes that I chose are to take advantage of the range that the stock has traded in since breaking out at $650 back in mid August. I can make up to 30.00 btwn 710 and 650.
Also, BID/ASK is very wide, I put my 5.00 bid in which was mid market and got hit. I never pay full bid ask in multi-leg structures like this.