Russell’s Redux – Weekend Review Revisited

Today, after the close, I checked back in on the Google (GOOG) Straddle I discussed in my Weekend Round Up blog this week. As a recap it was mentioned in the Striking Price column over the long weekend that the GOOG Straddle expiring on July 15th may be under priced. This analysis was based on shares of GOOG moving an average of 6.1% over the past 8 earnings releases, but the option contracts only pricing in a 5.7% move. Google is scheduled to report earnings on July 14th after the close so the options we are looking at trade for one more day after the earnings announcement. Today (Wednesday July 6) GOOG closed at 535.36, close enough to a strike price of 535 to determine what sort of expectations the option market now has for the earnings reaction of GOOG stock.

The July 535 Call was offered at 13.60 and the July 535 Put was trading at 13.20. So the net cost of a July 535 Straddle would be 26.80 (13.60 + 13.20). This means if the July 535 Straddle were held to expiration the stock would need to be over 561.80 or below 508.20 at expiration. 26.80 is very close to a 5% move from 535.36 in either direction. So Barron’s called a GOOG straddle pricing in a 5.7% move cheap, I guess at 5.0% it’s gotten cheaper. We’ll know for certain on the close on July 15.

One quick note of caution – there are Weeklys® available on GOOG. Be careful not to check out the contracts that expire on July 8. Those contracts will look like a great deal relative to earnings. However, they expire a week before GOOG’s earnings!