$GOOG Q3 Earnings Cheat Sheet

by Enis October 16, 2014 12:39 pm • Commentary

Event:  GOOG reports Q3 earnings today after the close.  The options market is implying about a 6.5% move, which is in line with the 4 qtr avg move of 6.5%, and the 8 qtr avg of about 5%.

Sentiment:  Wall Street analysts are very positive on GOOG, with 45 buys, 10 holds, and NO sells, and an average 12 month price target of $675.  Quite rare to have a company as widely followed as GOOG, with no sell ratings. Short interest is negligible at around 1% of the float.  The stock is down 5% year-to-date.

Options Open Interest:  Total open interest favors calls over puts by a ratio of about 1.3 to 1 for GOOG (combined for GOOG and GOOGL).  The one month average volume has favored calls over puts by a ratio of around 1.5 to 1. The $600 strike is has the most open interest in Jan15, at over 5k on the call line in GOOGL, and over 4k on the put line in GOOGL.  Weekly options open interest has no stand outs.
Price Action / Technicals:  GOOG has broken convincingly below its 200 day moving average for the first time since mid-2012:
GOOGL daily chart, 50 day ma in pink, 200 day ma in yellow, courtesy of Bloomberg
GOOGL daily chart, 50 day ma in pink, 200 day ma in yellow, courtesy of Bloomberg

The $511 low from April and May is the significant support level to watch on the downside.  On the upside, $550 is the first spot, and $575 is where resistance lies in terms of the broken 200 day ma.

Volatility Snapshot:  30 day implied volatility in GOOG has hit a 2 year high ahead of earnings today:

GOOGL 30 day implied volatility, courtesy of Bloomberg
GOOGL 30 day implied volatility, courtesy of Bloomberg

Volatility rose ahead of the April earnings report when the stock was selling off at the time as well, but the latest bout of volatility has led to much more options buying this time around.  As a result, options structures that are long premium are less attractive risk/reward into today’s event.

Our View:   GOOGL has been a favored market leader of the past 3 years, but the stock stalled in early 2014, and has not made a new high since.  That’s why the latest break of the 200 day ma could signal a longer-term trend change, or continued consolidation at the least.  With implied volatility pumped, we are going to look at possible options structures to take advantage of that.

We would also note that GOOGL has missed sales and earnings estimates in 5 of the last 8 quarters, yet the stock has rallied in five of the last 8 quarters, with an average gain of 6.4%, while the average decline in the day following the three declines has been only 2.4%.  The main point here is that GOOGL’s execution in either hitting their own guidance or that of the street’s expectations has not been fantastic over the past two years, but the stock has not necessarily reacted negatively.  Having said that, the current market backdrop is much different than the past 2 years.