Tuesday, April 1, 2014

Google (GOOG) - Earnings Preview: Option Market Reads: Risk is Here

GOOG closed Tuesday trading at $1,134.89, up 1.8% with IV30™ down 0.6%. The Symbol Summary is included below.

Provided by Livevol

UPDATED 4-3-2014:

Provided by Livevol

UPDATED 4-4-2014:

Provided by Livevol

This is an annual high as of 4-4-2014

This is an early pre-earnings check on GOOG.  I will follow this up on the day before earnings and make a final update.  But, there is enough going on with the volatility right now that this note is relevant and rather timely.

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

Provided by Livevol

On the stock side we can see the the price has appreciated over 70% but has realzied some of that momentum stock deflation of late.  But this is a volatility note, so let's turn to the IV30™ chart in isolation, below.

Provided by Livevol

We can see how the implied ebbs and flows around earnings, but I note something quite unique here.  Look how high the implied is for GOOG relative to the last two-years.  I have drawn that yellow horizontal line for an easier look back.

Earnings are due out  4-16-2014 AMC, so we have quite sometime before the event, but the volatility is already higher than four of the last five earnings cycles.  If this trend continues, we could see the implied for GOOG rise to a multi-year high, and at the very least, an annual high.  In English, the option market is finally starting to reflect higher risk.

But there's more.  The Skew Tab snap (below) illustrates the vols by strike by month.

Provided by Livevol

Note how GOOG skew is parabolic.  The option market reflects two-tailed risk equally.  This shape is actually "abnormal."  Let's turn to the skew shape one month ago.

Provided by Livevol

Here we see a beautifully normal skew shape.  The earnings event and momentum bubble deflation has pushed the tail risk in GOOG.

To read more about skew, what is and why it exists you can click the title below:
Understanding Option Skew -- What it is and Why it Exists.

Finally, the Options Tab is included below.

Provided by Livevol

The at-the-money (ATM) $1130 strike straddle prices a range for GOOG in [$1068, $1192] by the end of Apr expiry.  Let's see how that evolves as we approach earnings.  Keep in mind, GOOG can move far away from $1130 before earnings... In fact, I'd be surprised if it didn't.

This is trade analysis, not a recommendation.

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