Yesterday I was compiling the list of stock we want to focus on for earnings season. While working that I took a break to instruct a class. One of the strategies I was discussing in class was the straddle. Being earnings season I decided to demonstrate how expensive straddles can be in front of earnings announcements. The list I was working on before class has a couple of errors as far as earnings dates go and had listed the date for Google (GOOG – 742.85) to report earnings as this coming Thursday October 11th (note this is not the right date). With GOOG trading around 744 and assuming GOOG was to report on Friday I pulled up quotes on the Weekly options that expire this coming Friday. I was surprised to see the 745 Straddle that expires on Friday trading at around 15.00. Historically the price of GOOG has moved (higher or lower) about 6% the day after reporting earnings, this would be about 45 points based on the current level of GOOG stock. I even joked with the class, “If this is right, we need to take a break and go load up on GOOG straddles”. Needless to say, we did not take a break and load up on the straddles. We did what all traders should do in this situation we investigated why there appeared to be a dramatic mispricing.
Instead of googling ‘Google earnings date’ I actually just let the market tell me if I had the date wrong. I checked out the quotes for the next expiring GOOG options which turns out to be the following Friday October 19th. The 745 Straddle was quoted at 45.00 – pretty darn close to the historical move for GOOG after earnings. When I saw that I knew the date I had on my list was wrong for GOOG releasing earnings. I didn’t even need to google it.