Back on November 4th when the stock was around $560, we highlighted the waning momentum in Google (GOOGL) despite the market making new all time highs:
But it’s not the estimates that have caught my eye, it’s the price action and the technicals. The inability of GOOGL to keep pace with the broad market is the key, with the stock sitting flat on the year and 9% off of the 52 week highs that were made more than 8 months ago. Additionally, the declining momentum is about to manifest itself with what some technicians call the “Death Cross” where the shorter moving average, in this case the 50 day (purple below), is about to cross to the downside of a longer term moving average, in this case the 200 day (yellow below):
The “death cross” proved disastrous for GOOGL on a short term trading basis, with the stock making a series of lower highs, and ultimately touching the all important round number of $500 before finding its footing. The stock’s subsequent bounce could be reaching a sort of exhaustion period as it is now approaching its declining 50 day moving average, but importantly above the downtrend that has been in place since late September. It is my sense that a failure today to close above the downtrend would be reason enough to attempt a short bias trade eyeing a move back to $500. But a series of closes above the downtrend could signal the stock building steam for a continued bounce after a period of dramatic under-performance to the broad market:
Lets just say for now the stock chart seems to be in “no mans land” as it struggles to close the year in the black (currently down 4.25% in 2014, even after its 8% rally in the last week).
I would add one more thing, for most of this year I argued that the stock was crowded with investors who were convinced that given GOOGL’s scale and expected growth that it was a very unique value proposition among large cap stocks, with a PE to Growth (PE/G) of about 1. On a forward basis there seems to be some hesitance though on the expected earnings growth front, as analyst have tempered their forward views a bit. If there were to be an official re-set by the company, I suspect you would see a continued re-rating of the stock. The company does not give official guidance, so it will be a matter of extrapolating past results, which could place special emphasis on the upcoming earnings report and conference call.
Options prices in GOOGL remain elevated, despite the bounce, with 30 day at the money implied vol above 25%, as the VIX has dropped 40% in a week, into what should be a relatively quiet holiday trading period.
GOOGL is expected to report their Q4 results in the back half of January, most likely missing Jan expiration:[caption id="attachment_49290" align="aligncenter" width="600"] GOOGL 1yr chart of 30 day at the money IV from Bloomberg[/caption]
If you are of the mindset that GOOGL’s year to date underperformance portends weak Q4 results then it could make sense to start to set up an event trade that incorporates the next known catalyst (Q4 earnings) and elevated short dated options prices. I am not doing this trade at the moment, as I try to live by the old market saying “never short a dull market”, but If I were to fade the recent move in GOOGL, this is how I would do it:
Hypothetical Trade: $GOOGL ($536.50) Buy the Jan 2nd / Jan 30th 525 Put Calendar for $11.50
-Sell to open Jan2nd weekly 525 put at 2.00
-Buy to open Jan 30th weekly 525 put for 13.50
Break-even on Jan 2nd Expiration:
-Max profit in and around 525
-Ideal scenario is for stock to trade between here and 525 strike, leaving the Jan2nd short puts to expire worthless with that premium offsetting the decay of the Jan30th 525 put that is long.
-Worst case scenario is that the stock has a massive rally or decline between now and Jan2nd and the entire 11.50 premium could be a risk, but that is the max risk.
Rationale: The stock has had a nice bounce of late, and could be at an exhaustion point Options prices have stayed bid though, offering the opportunity to possibly take advantage of what should be some quiet holiday trading over the next week or so that will have a combined 3 trading days off, plus the weekends. If you are inclined to express directional views in a stock like GOOGL in the near term it makes sense to finance this view.
After the short strike rolls off it would make sense to further reduce the cost of the Jan30th put that you would own for earnings by turning into a vertical spread by selling a lower strike put of the same expiration, or possibly turn into a diagonal by selling a lower strike put of a different expiration.
Here is the thing, Jan30th options prices will likely stay bid to increase, which could also help offset some decay.
I am not doing this trade at the moment as I want to see if the stock holds here and established a new range above the downtrend that has been in place since September. If it does I would possibly look at a different structure to isolate the earnings event. If the stock were to fail this week, I would likely consider a lower strike like 520. Stay tuned.