Google Earnings: Searching For Option Plays

Published on: Jan 22 2013 by John Critchley

Google (GOOG) is poised to report Q4 2012 earnings after the bell on Tuesday, January 22. The search engine giant hopes to avoid a repeat of the debacle of the last earnings release. The last earnings release was indeed a shocker as a weak report sent the company shares tumbling nearly 8% that day. The company also suffered a black eye when these disappointing earnings leaked out before the scheduled release time, causing an unexpected mid day halt in the underlying. All in all, not a shining day for Page, Brin & Co.

GOOG is expected to report net income jumped 12 percent to $3.50 billion, or $10.58 a share, compared with prior year net income of $3.13 billion, or $9.50 a share. GOOG’s revenue for the quarter is expected to be a record $12.33 billion, compared with $8.13 billion a year ago, according to the Thomson Reuters survey of 38 analysts. (Source here)

The stock price has been treading water since the last earnings report. After falling nearly 8% following Q3 results, GOOG has risen ever so slightly over the last three months, up only 1% to $700 since October 18th, 2012.

The sentiment remains bullish in the analyst community. Currently, 45 analysts have a rating on GOOG with 13 maintaining Buy ratings, 21 Outperform and 11 Holds. This positive outlook on GOOG is not surprising, given the fact that over the past year the stock has also outperformed both the NASDAQ 100 (QQQ) and the S&P 500.

However, more importantly than beating estimates and what ratings the analyst community has on the underlying, of course, is how the underlying reacts after reporting. In this area, GOOG has a completely mixed record in the last 6 quarters. The shares have gone higher in the following day in three of the last six reports and lower in the other three quarters. This doesn’t leave the investor with much directional guidance.

The average non-directional based percentage move has been 6.14%.

Options Play

What makes playing GOOG’s earnings through the use of options quite tricky is that the company has a mixed history in the underlying movement post earnings.

Confused on what to do with the earnings? Long or short? How about playing both ways?

With earnings approaching, the implied volatility of the options is quite a distance from its 52 week highs. The 30 day implied volatility is trading around 29.76%, significantly less from the 52 week implied volatility high of 39.13% hit in July of last year.

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