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GOOG : The King of Earning play is here (Part-3)

Published on January 28, 2007

GOOG : The King of Earning play is here (Part-3)

January 28, 2007

Google for speculative stock option trading strategy: In sequence to Part-1 and Part-2, here is part-3 that reviews a little more about Google’s business and key developments in last quarter:

Google’s average share for past 3 months was roughly 84 basis points higher than JAS’06 and roughly >20% vs. last year. Besides search engine share, other key thing to note is the jump in Adsense content, solid >22% growth vs. last quarter.

Search Engine Market Share

One other data point, to review in conjunction, is the search engine market share and its growth so as to conclude something meaningful. However, in simple terms, search engine market has been growing, and Google has been growing market share in this growing market segment which may help push results above expectation.

During the same quarter, Google also added “Google documents”, free Web-based word processing and spreadsheet software to its free services. Google, Checkout – its online payment answer to Paypal, aggressively promoted during the holiday shopping season. During the same quarter, Google also partnered with Bharti Airtel of India (biggest mobile operator in India) to offer search services on Airtel Mobile.

And here comes the ultimate sensation of the quarter, acquisition of YouTube for $1.76 billion. Knowing Google and its business acumen, Google may announce something interesting that can be leveraged using YouTube. Any technology, that can promise far more targeted ads tailored to each viewer’s profile.

There maybe more news worth noticing, but I thought these were worth mentioning and actually make me more bullish than bearish.

GOOG’s Stock Chart:

It’s visible from the chart that most of the days when Google made a huge move were actually “earning” announcement dates. Since last quarter, Google price has not gone too far. In case results are positively viewed by street, Jan 31 or Feb 1 could see next price break out ($455 and $513 are support and resistance respectively). This data shows, a mere 5-7% move can easily take Google into a new territory.

Goog Chart

For those like to use Bernie’s method, here is a little more about the sentiments coupled with some other indicators. Use it with caution. Before the trading night, you may also want to check out Shortsqueeze ranking, Days to Cover (Short Ratio), and short % of float. Higher the short squeeze ranking, the more painful it will be for the short-sellers, and hence greater the rally, if the stock beats the estimates and raises guidance

Google Sentiments

Let’s recap, so far I talked about expectation from both Wall Street and retail investors, about business and key developments in the past quarter, potential opportunities, brief mention to stock chart, and some sentiments indicators.

In the next part I am going to review what kind of option trading strategies we can employ to benefit from the event of the week.

Till then,

Profitable trading, OptionPundit

12 Comments

  • MikeN says:

    I thought I’d drop you a line to tell you that I enjoy your site/blog. Yours is on of the sites i bring up every day. Good, well thought-out comments.

    Thanks.

  • optionpundit says:

    Thanks for the kind words Mike.

    Please do let know, at times, how can I improve it further.

    Profitable trading,
    OptionPundit

  • AK says:

    Hi OP

    Nice research, saved me hours. I have been steered clear of earnings play until you told me about backratio spread.

    I could have done one of the following
    1. speculative play by going either long or short
    2. straddle by buying call and put

    Both these require capital outlay and #1 is purely speculative just like playing a russian roulette.

    Instead I am tempted to go in and collect money no matter which side the stock moves. I am thinking of going in with backratio spread. The trade will be

    Buy x contracts FEB540C and sell 2x FEB550C. This gives a credit of 2.40

    Buy x contracts of FEB 450P and sell 2x contracts of FEB 440P. this gives a credit of $1.40 per contract.

    If GOOG moves up, the put backratio trade goes worthless and i get to keep $1.4. I will also buy back 550C and let 540C run up.

    If GOOG moves down, my Call backratio spread becomes worthless and i buy my 440P back, letting 450P run up.

    If you want to take more credit, you can even consider doing backratio for Mar on same bid/ask. The credit for mar expiry will be $5.5 for Call leg and $4.1 for put leg.

  • Hi Manoj,
    Great site you’ve got here esp for those who want to learn more about advanced strategies.

    Nice write-up on GOOG, and good luck for this play.

    Cheers,
    Fellow Grad

  • optionpundit says:

    Hi AK,

    If I use your method i.e.
    Callside: Buy +1 540/ Sell 2 550. It’s a debit spread of $1.70. Putside: Buy +1 450/ Sell 2 Put 440. It’s again debit spread of $1.85.

    My trade cost is going to be $3.55 and for me to make money, google needs to cross $563.47 or $426.50.

    I am expectong the most of 7-10% movement in google and from that point of view, risk/reward is not attractive as this may be a losing trade. Am I missing something?

    Profitable trading,
    OptionPundit

  • ty says:

    Hi Manoj,

    its credit not debit for both call and put side. For Buy +1 540/ Sell 2 550. Putside: Buy +1 450/ Sell 2 Put 440

    So do you have any opinion on how to play for this to night?

    TY

  • optionpundit says:

    Hi TY,

    Thanks for pointing it out. U R correct. I had inverted the trade in my analyzer.

    This is quite an interesting trade and this will make money as long as GOOG remains in between $426 and $562 by Feb expiration. Potential gains, $330 (most likely) to $1200 depending upon where stock will be by expiration. Margin required is over $5330. The risk to reward is 6%.

    Besides very low reward to risk ration, other issue that I see with Ratio spreads is that the risk is HUGE. If for whatever reason, there is extreme in either direction the losses will significant.

    Overall, seems like a good alternative. I am looking for more ways to play and will share soon.

    Cheers,
    OptionPundit

  • […] Recap: I presented past earning data, sentiments, key development and some business data about google in Part-1 and Part-2, and Part-3. Now Let’s discuss how to play this.  […]

  • […]   « RUT Iron Condor (Feb’07, Closed for 88%, 23.38% Profit) GOOG : The King of Earning play is here (Part-3) » […]

  • […] Don’t read this if you are not willing to lose 100% of investment in this speculative trade. Google in my opinion is still the king of earnings play. I covered Google extensively in several parts. For those who love fundamental analysis, here is the 3 part series. […]

  • Tony Chai says:

    Hi OP :

    Very well researched & written article. Just curious, which line are you in, or are you a professional trader?

    Thanks for the information.

  • OptionPundit says:

    Dear Tony, thanks, when you do whatever with heart, it’s professional, isn’t it?

    Profitable trading, OP

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