Trade Update – $GOOG: Closing Half Feb Puts For A Quick Gain

by Dan February 3, 2014 1:54 pm • Commentary

On Friday morning, after GOOG gapped higher on its Q4 results that I would say were mixed (despite the price action suggesting investors thinking it was fabulous) I made a very bad entry on my bearish trade. When the stock was $1162 I bought Feb puts (below) with the idea that I would leg into a put spread on further weakness.  Well I got anything but weakness for the balance of the trading session and the stock closed at a new all time high on Friday.

Now with the stock reversing all of Friday’s gains, and below the price that I bought the Feb 1150 Puts, I can now sell some for a gain and take some of the pain of the poor entry off of the table.  I am going to do that, but let half of the position ride as I think there is a good shot that the stock tests $1100 on further market weakness this week.

Action: Sell to Close half GOOG ($1137) Feb 1150 Puts at $31 for a $12 profit




Original Post Jan 31st, 2014:  New Trade – $GOOG: Investors Have Googly Eyes 

A week ago I made the case (below) that GOOG was setting up to be one of the most crowded safe haven long trades in all of large cap U.S. equities.  Last night the company reported Q4 results that missed on the top line, but showed healthy growth in their core business (largely search).  

Bernstein Research, who rates the shares a Buy with a 12 month target of 1350, had the following to say about their view on the results, which largely echoes the Street view:

Google’s 4Q13 results increase our confidence in our bullish thesis. Some investors we talk to voice frustration because they missed the upward “re-rating.” We think there is still room for the stock to outperform and would in fact upgrade it further if we could. Google Sites revenues, which includes search, accelerated and beat consensus and our estimates. Second, we saw the reacceleration of Google Network revenues earlier than expected. Third, core headcount grew at about 17% YoY, while FX-neutral revenue grew at 23%, leading to EBITDA growth roughly in line with gross profit. We expect this trend to continue and lead to a better-than-consensus margin trajectory in 2014 and 2015, as Network revenues reaccelerate and FX headwinds subside. The one area of concern is the continued high level of capex and its detrimental impact on FCF.

These results don’t change my thesis whatsoever as cost per clicks continue to come down as does company wide gross margins.  If sales growth were to de-celerate due to a faltering global growth, GOOG could see 10% downside very quickly in my opinion, largely due to the concentration of longs and its hefty gains over the last year.

I did not pull the trigger on the bearish trade as yesterday’s gains in FB and the entire internet space freaked me out a bit (as they should have), but I am now going to place my trade, though now going to just buy an outright put with vol coming in post results and look to leg into a spread on future weakness:

TRADE: GOOG ($1162) Bought Feb 1150 Put for 19.00

Break-Even on Feb Expiration:

Profits below 1131

Losses: up to 19 btwn 1150 and 1131, max loss of 20 above 1150


Original Post Jan 24th, 2014:  Name That Trade – $GOOG: Googly Eyes

OK, so GOOG is the new AAPL circa 2012. I get it. So If I talk crap about your most beloved holding, I apologize in advance for offending your portfolio, and I am prepared for the hate-mail.  That being said I believe regardless of the Q4 results GOOG reports next Thursday after the close, the stock is the most crowded “safe haven” trade that currently exists among U.S. equity investors.  Granted, they are a monopoly and their investments in stuff  like Nest or robotic dogs could be the next new new thing, but as an investor I wouldn’t hold my breath, I think it is safe to say they are a one trick pony (search which is still growing 20% a year), and an excellent one at that.

In the summer of 2012 you were a moron if you tried to make a case why AAPL was likely to run out of steam, whether it was predictions of the next iThingy, overzealous investor sentiment, or merely the law of large numbers, bulls looked at you like you had 3 heads if you tried to poke holes in the story near the highs.  I for one was a bit too early and got carried out the short from $600 to $700, but I learned my lesson and generally like to wait for what I think is the very Tippy Top to try to play for the end of cult story.

GOOG fits the bill, it has become the third largest market cap company in the U.S. behind AAPL and XOM, sporting a marker cap of almost $380 billion, shockingly having gained the market cap of EBAY and YHOO since they reported their Q3 results back in October, up 30%!

Sentiment is off the charts, with Wall Street analysts overwhelmingly bullish with 39 Buys, 12 Holds and No Sells.  Short interest sits at less than 2% of the float, despite the stock’s more than 50% gains in the last year.

I would make another fairly important point, analysts expect the company to re-accelerate earnings this year to 19% growth, after 2 consecutive years of 11% growth year over year, at a time where sales have seen massive deceleration, from 37% in 2012, to 20% last year, a rate that analysts to expect to stay constant in 2014.  This seems to me to be a fairly high hurdle, and with the stock trading at about 21.5x this years expected earnings growth it is not exactly cheap.

I know, I know, that is fabulous growth for a company the size of GOOG, and AAPL as recently as 2012 was growing sales in earnings at a faster pace on a larger scale, but we all know how that ended… the company had its first year over year earnings decline in more than a decade in 2013 and saw sales growth got from 40% plus to high single digits.

Again, I have no axe to grind, the company has been firing on all cylinders, and has been adequately rewarded. I just think it is a very crowded trade and priced to perfection, and as we learned in AAPL over the last 2 years, just as massive cult stocks like AAPL can overshoot on the upside they will most likely do the same on the downside.   In the near term for those looking to make a contrarian bearish bet, I like targeting $1000 (green below), the level it gapped to back in October.  I also like using the $1100 level as the long strike as it corresponds with a key near term support level of the 50 day moving average (purple below):

GOOG 1yr chart from Bloomberg
GOOG 1yr chart from Bloomberg

Unlike many other large cap tech stocks that we have looked at so far into Q4 earnings, GOOG’s Implied Volatility is very high, above levels seen in its prior 3 reports, this has been a very rare occurrence so far in this earnings period and needs to be taken into account on straight premium purchases.

GOOG 30 day at the money Implied Vol 1yr chart from Bloomberg
GOOG 30 day at the money Implied Vol 1yr chart from Bloomberg

With the market having a rough couple days, and GOOG down 3% in  the last 2 days, I am not sure this is the right spot to press it on the short side, but next week, prior to their Q4 print I will be looking to make a defined risk bearish bet into earnings.  I would love to do this on a bounce in the stock (prices reflected are with stock here, the structure would be cheaper higher in the stock where I’d look to enter):

Hypothetical Trade: GOOG ($1133) Buy Feb 1100 / 1000 / 900 Put Butterfly for 15.00

-Buy 1 Feb 1100 Put for 23.00

-Sell 2 Feb 1000 Puts at 4.50 for a total of 9.00

-Buy 1 Feb 900 Put for 1.00

Break-Even on Feb Expiration:

Profits:  btwn 1085 and 915 make up to 85, max gain of 85 at 1000

Losses: btwn 1085 and 1100 lose up to 15, and btwn 900 and 915 lose up to 15 with max loss of 15 below 900 and above 1100.


Google is barely off its highs and has a very important earnings event. This structure allows for a bearish bet with a wide range of possibility without buying a ton of premium at these high vol levels. Stay tuned for when we decide to enter this trade.