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Minyan Mailbag: Google Options


What's distinctive about GOOG is both the excessive overpricing and the length of time it has stayed overpriced.


Minyan Pat responds to the following Oct 5 buzz post by Minyan Adam Warner:

Since its one-year anniversary a month or so ago, everyone has known it's going into the S&P, and everyone remembers that day in 1999 when Yahoo rallied 50 points from a similar price level on their admission to the club.

Google options have changed hands at a low 30's implied volatility for 6 weeks now, while the GOOG has given the term "range bound" new meaning. In fact the historical volatility of the stock itself has hovered at or below 20, a huge discrepancy from the options for such a long time frame. The implication is that had you net-owned GOOG options in anticipation, you'll need a Yahoo-like move to make up that time decay.

Of course GOOG could get their fraternity bid tonight, making this analysis truly "historical" in nature, but I just wanted to highlight the folly of buying options ahead of news that is essentially priced into the marketplace already...

position in GOOG

Minyan Adam,

Even if that is the case, and GOOG is added to the S&P tonight (it wasn't - I am a little late this west coast evening in checking my Minyan News) I still feel that the real catalyst for October premium rests in the hands of the earnings announcement ... which happens to fall on the 20th, day before Oct expo ... so one can count on October premium to stay rich for basically the entire "life" of the option ... I feel the best way to finance this Oct premium/gamma, is to sell out of the money December premium/vega ... I think a 2:3 ratio works best, but that is ultimately a function on what strike is sold and volatility level ... leaning long or short the underlying stock/deltas will amplify the risk, but also the return/loss if correct/wrong on direction ... keep an eye in the volatility skew and at-the-money straddles ... they will give indications of how the Street is expecting the stock to react

To sum it up ... if you think GOOG premium is expensive now, it will be ginormous on the 19th and leading into announcement ... if by some chance GOOG shits the bed, and I am not placing my chips that it will, but IF it does volatility will instantly double and what was once thought expensive, will seem like a garage sale ... it's just a bit tricky managing the inventory in the interim ... stay hedged and stick with it. Have a GOOG night. What time do the SF Giants play?

Position in GOOG.

-Minyan Pat

Minyan Pat,

Those are all good points. At this juncture, October will likely hold its volatility as long as it's here already, particularly in this choppy environment. Most tech stocks with earnings before October expiration are trading at volatilities higher than their stocks justify, so GOOG's not unusual there. What's distinctive about GOOG is both the excessive overpricing (it's consistently 10-15 points, or 33%-50% overpriced, depending on how you want to look at it, about double most others) and the length of time it has stayed overpriced (at least 6 weeks now, also about double the typical tech stock). The dollar moves in GOOG post-earnings look more impressive than the actual % move, which has been pretty ordinary since their first ever report when GOOG was a $150 stock or so.

-Minyan Adam

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