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Google Options Hangover?


You Mean that "Time Decay" means more than an expiration of my news magazine subscription?

Does the new Google (GOOG) Options Exchange for employees have implications for volatility in GOOG?

In my humble opinion, yes. Huge.

You suddenly have an overhang of calls for sale at presumably every strike price known to man. Which is not unusual, as most tech companies have this. The difference is that they will now work their way into the actual GOOG option market place. Pros will buy calls from the employees, and hedge by shorting stock and/or listed calls against them, which gets everyone long gamma.

What do pros do when they are long gamma? They buy weakness in a stock and sell strength.

What happens when all moves in a stock get faded? The stock gets less volatile.

What happens when a stock gets less volatile? Options get cheaper in volatility terms.

Rinse, repeat. It's the Volatility Circle of (Non) Life.

The extreme example of what happens when employee options bleed into the marketplace is of course Microsoft (MSFT) from a few years back. JP Morgan (JPM) (I believe) bought out all employee options (or at least took down all options tendered to them by the holders). They now had massive amounts of gamma at all sorts of strikes and durations.

And lo and behold, they became a self-fulfilling cycle of option implosion. MSFT's volatility went from mid 20's to about 12.

Now there are crucial differences between GOOG and MSFT.

MSFT was already significantly off the bubble highs when the option deal went down. So hence the lion's share of the options were calls with strikes above where MSFT was trading at the time (around here actually).

So you effectively had (and may still have) a huge wall of stock for sale into MSFT strength.

Since GOOG is near all-time highs, most calls are presumably itm)">in the money (ITM). So the effect may be a bit different.

I wouldn't expect GOOG volatility to go to 12 as quickly as MSFT. But by the same token, options are overpriced here to begin with based on the stock action. And they get more overpriced the further you go out in time.
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