Trade Update – $GOOGL: Closing June / July Call Calendar

by Dan June 18, 2015 2:52 pm • Commentary

Back on May 8th we set our sights on financing the purchase of out of the money calls, targeting what was estimated to be Google’s Q2 earnings on July 16th, here was the trade (full post below):

Trade: GOOGL ($550) Buy May 29th weekly / July 570 call calendar for $9

Then on May 28th we rolled the short strike to June Expiration to reduce our break-even and premium at risk (full post below):

Action: GOOGL ($551.30) Buy to Close 1 May 29th 570 call for .10

Action: GOOGL ($551.30) Sell to Open 1 June 570 call at $3.10

New Position: Long GOOGL June / July 570 Call spread for $6

Now with the stock at $555.65, and a day before our short leg expires once again we have the opportunity to roll the short strike, and further reduce the premium at risk, while still eyeing the earnings event. But here is the problem. As I was looking at term structure it became very clear by looking at the July 17th 570 calls, which are $6.50 bid (19.30% in implied vol terms) vs the next week’s July 24th 570 calls, which are 8.50 bid (20.30% in implied vol terms), that despite the date yet to be confirmed from Google, options traders are pricing the event to fall in the week that includes July 24th expiration.

If this is in fact the case, the July 17th 570 calls will certainly lose value once there is official confirmation, as they will no longer have the potential of the event and thus should be worth less in vol terms than the following week.

While this is all speculation as to when the company will report, the options market is clearly suggesting that the options we own are in the wrong expiration, so we are going to close the trade for a small gain, and reconsider our bullish thesis on Google, and how to play it from here:

Action: Sell to Close GOOGL ($556.60) June / July 570 Call spread at $6.70 for a 70 cent gain.

-Bought to Close 1 June 19th 570 call for .10

-Sold to Close 1 July 17th 570 call at $6.80

Rationale: This was not the desired results as we were isolating the earnings event as a catalyst, but the uncertainty and what we can glean from the options market suggests that we have the wrong trade on. The most prudent thing to do here is to close the trade.

 

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Previous Post May 28th, 2015: Trade Update – $GOOGL: Rolling Strikes for Call Calendar

A few weeks ago I placed a bullish trade in GOOGL that financed the purchase of July calls by selling May29th weekly calls. To refresh, from May 8th:

Trade: GOOGL ($550) Buy May 29th weekly / July 570 call calendar for $9

-Sell to open 1 May 29th weekly 570 call at $2

-Buy to open 1 July 570 call for $11

Now with the stock a tad higher, the spread is worth a little less than what I paid. The May29th 570 calls are essentially worthless, and I am going to buy them back to close and sell a June 570 call to once again create a calendar call spread, further reducing my premium outlay.

Action: GOOGL ($551.30) Buy to Close 1 May 29th 570 call for .10
Action: GOOGL ($551.30) Sell to Open 1 June 570 call at $3.10
New Position: Long GOOGL June / July 570 Call spread for $6

 

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Original Post May 8th: New Trade – $GOOGL Calendar

I kind of have Google on the brain over the last 24 hours. Yesterday I detailed a short dated trade in June expiration that looks to benefit from the stock moving back towards its 200 day moving average in the coming weeks, while setting a stop to the downside at near term technical support at $540 (read full post below).

And then this morning, I dug a little bit deeper into the potential for investor focus to shift towards hopes that the incoming CFO (from a large Wall Street bank) will be the architect of a massive capital return plan of the company’s existing $70 billion in cash (also below).

So with more thought, comes more trade ideas, and while the trade from yesterday is likely to be taken off in the near term if the stock reaches our goal sooner than later, the next trade that I want to detail targets a similar range in June, but helps to finance owning longer dated calls in July which should catch the company’s next identifiable catalyst, Q2 earnings (besides the annual shareholder meeting on June 3rd which will be way to soon for any news on plans for capital return).

Trade: GOOGL ($550) Buy May 29th weekly / July 570 call calendar for $9

-Sell to open 1 May 29th weekly 570 call at $2

-Buy to open 1 July 570 call for $11

Break-Even on May 29th weekly Expiration:

– Max profit at $570, up $20, max risk of $9 with a sharp move above $570 or below current levels.

Rationale: The idea is to target a breakout above recent technical resistance with a reversal of the recent trend of earnings misses on their Q2 report. As we are already one week into May, and the last week of May has a long holiday weekend we think it makes sense to look to finance the purchase of the longer dated calls. If the stock is below $570 on May 29th weekly expiration we will look to sell a higher strike call in July to further reduce the premium at risk.

A quick look at the one year chart below shows the stock’s underperformance of GOOGL, up just a few % over that last 12 months. The green line targets the ideal level on May 29th weekly expiration:

GOOGLl 1yr chart from Bloomberg
GOOGLl 1yr chart from Bloomberg

 

 

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Previous Post May 8th, 2015: MorningWord 5/8/15: Stop Googling Yourself

Yesterday we detailed a near term bullish trade in Google (New Trade – $GOOGL: I’m Feeling Lucky). The stock has filled in the entire earnings gap. A gap that, quite frankly, I was surprised it gapped to two weeks ago following a third consecutive earnings and sales miss.

However, the premise of the bullishly biased trades is that with the start of their newlyappointed CFO Ruth Porat in a couple weeks, investor focus may shift to capital return, which could be a massive catalyst for the shares:

Has Ms. Porat been hired with a $70 million pay package to figure the best way to deploy the company’s $70 billion in cash? I would suggest that is a good bet and if the company is not going to get active with M&A, at this stage of growth and rates where they are it would make sense to take on some debt, pay a dividend and buy back a lot of stock. As Ms. Porat’s May 26th start date nears I suspect we start to hear a bit more speculation about cash return (which would obviously take months, if not quarters to iron out) but it could put a bid in the stock.

Back in February, prior to the announcement of Ms. Porat’s hire from Morgan Stanley, Barron’s opined about the near term financial future of Google in a story titled Google – Time to Return Cash to Shareholders:

“Google could boost its shares 5% to 10% overnight by announcing a dividend and share-buyback program.”

The article highlighted the positive affects on other mega-cap tech stocks of capital return:

Apple’s announcement of its initial dividend and buyback program, in March 2012, boosted its shares by 3%—and that action was widely expected. Google could comfortably pay a 2% dividend yield and repurchase 3% to 5% of its shares annually. Apple (AAPL), which initially dragged its feet, has become a big convert to buybacks, having repurchased $45 billion of stock in its fiscal year ended last September. Microsoft (MSFT), which has a similar market value to Google, returned about 5% to shareholders in its latest fiscal year in dividends and buybacks.

Aside from rates being low, for now, and the attractiveness of buying back stock with essentially free money, Barron’s highlights the other benefits of capital return plan:

A dividend and buyback would broaden Google’s investor base to include institutional investors who require a dividend, and it would help the company stay competitive in the tight market for talented engineers and other key employees in Silicon Valley, to the extent it boosts the share price.

I suspect some form of capital return is coming to a theater near you as it relates to Google. And if they can somehow manage a combination of a modest dividend, $20 to $40 billion buyback and some M&A that addresses their blind-spots (real time search, social media, mobile messaging) and you will have a stock that has gone from massive under-performer back to its prior highs in a quick.

In the past we have discussed the possibility of Google unlocking some value as it relates to YouTube (MorningWord 6/30/14: Should YouTube Try Googling Itself?), and we see no shortage of creative ways the company could reinvigorate its stagnate stock price. As Barron’s noted, outgoing CFO Patrick Pichette mentioned on their Q4 call in January that they do care about GOOGL’s stock price:

I just can reiterate the same message that I give on a regular basis, which is share price does matter. It matters to our board. It matters to all of us.…We do review this issue on a regular basis.…I just have nothing to announce today.”

Obviously we are warming to the stock, despite growing competition from Facebook and others, we think a little financial engineering, coupled with some smart m&a could have shares testing the prior highs in at some point in 2015.

 

 

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Original Post May 7th, 2015: New Trade – $GOOGL: I’m Feeling Lucky

On April 23rd Google (GOOGL) reported Q1 earnings and sales that missed consensus for the third consecutive quarter, reporting sales up 12% year over year, with paid clicks up 13% yoy. The stock rallied 3% the next day. GOOGL has since filled in the entire earnings gap:

GOOGL 1yr chart from Bloomberg

The stock has been a massive under-performer, up just a few % in the last year and down 10% from the 52 week highs. Valuation is possibly becoming a concern for the first time in a while, with the stock trading at 19x this year’s expected earnings growth of 11%, after printing the lowest year over year earnings growth in a qtr in Q1 (5%) in 3 years. The strength of the dollar was a clear headwind.

In a few weeks the company will welcome a new CFO who was recently hired on a $70 million pay package. Has Ms. Porat been hired for $70 million to figure the best way to deploy the company’s $70 billion in cash? I would suggest that is a good bet and if the company is not going to get active with M&A, at this stage of growth and rates where they are it would make sense to take on some debt, pay a dividend and buy back a lot of stock.

As Ms. Porat’s May 26th start date nears I suspect we start to hear a bit more speculation about cash return (which would obviously take months, if not quarters to iron out) but it could put a bid in the stock.

In the near term the stock is just above a near term technical support level, which for those inclined to be long I think it makes sense to set a stop near $540, while targeting a move back towards $560, which is where the 50 day moving average (purple line) just crossed above the 200 day moving average (yellow line). This is pattern can be refereed to as a “golden cross” which can indicate a pick up in near term upward momentum.

This is how I am going to play, defining my risk, and stopping myself at $540 over the next 6 weeks:

Trade: GOOGL ($544.25) Buy to June 540/565/590 call butterfly for $6

-Buy 1 June 540 call for 17.20

-Sell 2 June 565 calls at 6.60 each or 13.20 total

-Bought 1 June 590 call for 2.00

Break-even on June Expiration:

Profits: up to 19 between 546 and 584, with max gain of 19 at 565

Losses: up to 6 between 540 and 546 & between 584 and 590, max loss of 6 below 540 and above 590.

Rationale: I have limited my risk to a little more than 1% of the underlying stock price, to possibly make up to 3.5% in a wide range to the upside, while stopping myself at important near term technical support. The break-even of $546 is just above where the stock is trading. Any moves higher or lower in the very near term won’t affect the trade greatly (it’s less that 10 deltas here), but as June expiration approaches the deltas start to gain as long as the stock is above 540 and below 565. On any move to 565 I’m likely to take profits no matter when.