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Earnings Rundown for Google

$GOOG reports after the bell.

And as they always do, they report the day before expiration, which can significantly increase the volatility of the stock.

From a market sentiment standpoint, the stock has been pretty bipolar. About a month ago, the stock broke key support and there was gnashing of teeth as all hope was lost and they were losing pageviews to facebook and $BIDU.

Then all of a sudden, their new product Google Plus emerged. Optimism was found once again and the stock rallied about 80 points into previous resistance.

The market rally didn't hurt, either.

Beat and Raise?

There's whisperings that the numbers they put out this quarter will be better than expected. But this is the same song and dance where the company will report solid earnings that were ahead of estimates that were too low to begin with, but then their guidance comes in light.

And the only reason their guidance is light is so they can beat again next quarter.

What's important here is we focus on the reaction to the news, not just the news.

The esteemed premium seller.

The esteemed premium seller.

Great Expectations

So here we stand, with plenty of uncertainty in the name as it heads into earnings, right?

Not so fast.

Remember, options have two parts in pricing: intrinsic and extrinsic. Extrinsic is related to time risk and volatility risk. Since the July options expire tomorrow, any extrinsic value is directly related to the event. I explain this much more in detail from when I covered $AA earnings.

At the time of this writing, $GOOG was trading at 531.50. So we can look at the 530 straddle (call + put) to give us an idea of what the market is expecting.

The 530 straddle is currently going for 26.90 on the offer. So we can take the price/strike and it shows us the market is pricing in about a 5% move.

The average 1-day move that $GOOG puts in after earnings has been a little over 7%, averaged over the past 4 quarters. So it appears that $GOOG options are underpricing the move.

But wait, there's more.

The front month options are carrying a triple-digit implied volatility. This makes sense because of the event coming up, and the readings are in line relative to the past 4 events.

And if we look closely at longer term implied volatility readings, we can see that we're closer to the high end of the range than the low end.

courtesy of livevolpro

Furthermore, if we take a look at the expected risk perceived by the options market, we can see that it lines up nicely with some support and resistance levels.

courtesy of tdAmeritrade, Inc.

Put It All Together

Big surprise, an analysis of $GOOG options and potential trades requires a little nuance, and it is a bit of a mixed bag. I think volatility is a sell here, but what's more important is how you structure your risk. Selling that 530 straddle is probably the stupidest way to put on the trade. Consider iron condors or something along those lines to help you manage your risk a little better.

by Steven Place

Steven Place is the founder and head trader at investingwithoptions.com/