Name That Trade – $GOOGL Yourself

by Dan January 9, 2015 12:54 pm • Commentary

Regular readers know we were somewhat bearish in Google for the better part of 2014 (read here from Jan, here from Nov, and here from Dec).  The thesis was a combination of inputs, unusually bullish sentiment, waning momentum and technicals, and what appeared to be either spotty execution or management’s disinterest in matching Wall Street expectations.

As we head into Q4 results, scheduled for January 29th after the close, all of the above named inputs could not be more important as the stock has been a serial under-performer lately.  While sentiment has shifted a bit (evident by the stock’s poor price action) I think it is important to mention that the stock is at key technical support level, just above $500, and looks like it is holding on for dear life:

GOOGL 5yr chart from Bloomberg
GOOGL 5yr chart from Bloomberg

A break below $500 on news, would leave an air-pocket down to the October 2013 breakout level of $450, down 10%.

Options prices have been moving higher, likely a function of investors looking for protection as the stock makes 52 week lows, but also a function of the greater volatility we are seeing in equities, and obviously the anticipation of the late Jan earnings event.  Thirty day at the money implied vol is likely to rise even more before the print:

[caption id="attachment_49770" align="aligncenter" width="600"]GOOGL 1yr chart 30 day at the money IV from Bloomberg GOOGL 1yr chart 30 day at the money IV from Bloomberg[/caption]

Looking at the Jan 30th weekly expiration that will capture Q4 results, the implied move between now and then looks pretty fair.  The Jan30th 500 straddle, stock ref $500.50 (long the call and the put) is offered at ~$30. So if you bought the Jan30th 500 straddle for $30, you would need a move above $530, or below $470 to make money on expiration, or about 6%.  This seems pretty reasonable when you consider the strong likelihood that the stock moves at least 3 to 4% the day of expiration following the earnings report with any moves before then a bonus.

Alternatively, for those who have a view, or are possibly looking for protection, the Jan30th 500 puts offered at $14.50 seem more than reasonable, at 3% of the underlying stock price.

As for our view here, pressing an oversold condition has not been a winning strategy in single stock land of late, we would prefer to re-short on a bounce back towards the downtrend but we’ll be keeping an eye on this underperformer.