Thursday, December 26, 2013

Google (GOOG) - Volatility Dipping; Has the Option Market Fallen into a Mistaken Malaise?

GOOG is trading $1,117.65 up 0.5% with IV30™ up 3.9%. The Symbol Summary is included below.

Provided by Livevol

Google Inc. (Google) is a global technology company. The Company’s business is primarily focused around key areas, such as search, advertising, operating systems and platforms, enterprise and hardware products.

This is a stock and volatility note.  I see some pretty low volatility in GOOG right now.  This is nowhere near the obvious mis-pricing we saw in TWTR two weeks ago, but it's worth a look.

To read the TWTR post, you click on the title, below:
Twitter (TWTR) - UPDATE: How the Option Market Totally Blew It, And We Knew it Two-Weeks Ago.

Let's start with the GOOG Charts Tab (two-years), below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

Provided by Livevol

On the stock side we can see the incredible rise of what is now a gigantic firm and possibly the front runner for the first first firm to ever reach $1 trillion in market cap (but don't fall asleep on AAPL). In the last two-years GOOG has added ~$200 billion in market cap value.  I'm actually laughing as I write that it's such a big number... Very well done management.

Check out the gap on the last earnings release (the blue "E" icons represent earnings dates). GOOG popped from $888.79 to $ 1,011.41 or ~14% in one day. So what?... Well, there's a volatility story building here.

Let's turn to the two-year IV30™ chart in isolation, below.

Provided by Livevol

The rises and falls into and out of earnings (the blue "E" icons) are normal, but I find a little abnormal is the current level of the implied.  Right now GOOG's IV30™ sits in the 14th percentile on an annual basis.  Hmmm...

Now that red curve will rise into earnings which are due out in mid January, and if it follows the general pattern of the last two years, that peak will be lower than the prior peak.  But, last time that was incorrect -- which is to say, the option market mis-priced the risk in the shares and the stock gapped more than $120 in a day.

This follows a similar pattern I have been seeing in the option market overall, which is a general malaise in pricing risk. I recently posted an article entitled:
Just the Facts Ma'am: Is the United States in a Bubble? Does the United States Look Identical to Japan Right Now?

Whether or not the US is in a bubble, there is a question.. that is, there is a two-sided argument. If that's the case, then a behemoth cap that has seen a rise in market cap over two-years that in and of itself would make it a top ten company by size in the US, should probably not be seeing volatility levels in the 14th percentile.

Finally, the Options Tab is included below.

Provided by Livevol

Across the top we can see that Jan vol is priced to 16.69% and Feb vol is priced to 21.78%.  That vol difference is likely due to earnings, so potentially look for GOOG earnings to come out after Jan 18th (or so the option market seems to be pricing).

Watch GOOG.  Watch the market. Watch the volatility.  I don't think now is the time for malaise.  But I have been wrong before... many times...

This is trade analysis, not a recommendation.

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