OK GOOGL – Fitter, Happier, More Productive

by riskreversal October 4, 2016 3:42 pm • Trade Ideas

Today Alphabet (GOOGL) introduced their (kind of) much anticipated digital assistant, called Assistant to compete with Amazon’s (AMZN) Alexa/Echo products. The company also introduced a line of Google designed and branded smartphones that will compete with their bros (Samsung) and foes (Apple).  At the core of these product announcements is, Artificial Intelligence (AI).  You know the drill here, nothing that’s gonna change your life meaningfully for the time being, but clear will eventually be embedded in some way shape or form into every device that has a chip (read Dan on this from July here and CC from this morning here).

Since the company’s Q2 report on July 28th, and the stock’s subsequent gap, nearly matching all time highs, GOOGL has been oddly range-bound, trading at an average price of $800.  This what options traders call a pin:

GOOGL 1yr chart from Bloomberg
GOOGL 1yr chart from Bloomberg

If you were expecting GOOGL to move following today’s event, like AAPL tends to do into and out of anticipated hardware product launches, then you were mistaken, cause the stock is still stuck. But I suspect that is about to change in the next month as the options market is expecting about a 5% one day move following their Oct 27th Q3 report, which is basically inline with the 10 year average one day post earnings move.  In the last three years, GOOGL has declined the day after earnings once each year:

from Bloomberg
from Bloomberg

The chart of the stock over the last 5 years is fairly astounding going from $250 to $800 a gain of 220%, more than 2x the performance of the S&P 500 (SPX) and about 2x the Nasdaq Composite (CCMP). Just eyeballing the earnings events below over that period, it appears that the stock has had a tendency to establish a new range with a move into and out of earnings:

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

Back to that implied move, with the stock at $801, the Oct 28th weekly 800 straddle (the call premium  + the put premium) is offered at $47.50, or about a 6% move in either direction. If you were convicted on the thought that the stock was going to breakout of its current range between now and earnings, well then options look fairly cheap given it captures the event.  If the stock were to go sideways for another few weeks though this would be excruciating premium to own (read our post on trading straddles from last week here).

So What’s the Trade?

Looking at the possibilities of a calendar, with selling the October regular options in order to buy the Oct 28th (expiring 1 trading day after the event) and you see others have already prepared for that, with October21st expiration as just 16 vol and Oct28th with 29 vol.

Therefore October 28th expiration is where it’s at for any moves from the 800 level. The Oct28th 800/850/900 call fly is about $14 and offers profit potential up to $36 on a move in line with the implied move higher. That’s good defined risk near highs for a realistic move to new highs.

As far as hedging existing long stock? The 200 day moving average is something to lean on at 750 and protection below in the form of the Oct 750/700 put spread for around $5 with potential to cover $45 in losses in the stock down to 700 could help with holding stock into the event.

For strictly bearish positioning looking out to year end, the Dec 800/700/600 put fly is about $20 with a very realistic breakeven point of 780 on the downside and a profit range of 780 to 620 into year end, with a max profit of 80 at 700 on Dec expiration.

We started looking at the news, then the chart and price action, and then considered what comes next. We are not inclined to trade the name at the moment, but thought interesting enough to consider potential movement and consider some ways to trade it.