When I looked at AAPL earnings the other day, based on what I was saw out of the Steve Jobs news, I had a feeling that the stock might have a bit of a dud earnings report. Not a bad report, just no action. When I look at GOOG I do not see the same thing, I think the stock could have a heck of an earnings in one direction or another. Here is why:
1. As good as AAPL has been over the last few weeks, GOOG has been better. It has increased in percentage terms, even more than AAPL. This run up has not stalled the same way AAPL stalled at 345. It has been consistently up over the last month and half. More than 5% since 2011 began and more than 10% since December began. A run up like this is usually a scary thing ahead of an earnings report.
2. The way 30 day volatility has spike has been impressive. Currently, despite being priced almost 20% higher implied volatility is actually higher.
3. January volatility is trading at a really high premium even relative to past earnings cycles. Yes volatility isn't 'real' this close to expiration, however it does express relative straddle price somewhat well. In October, on the night before GOOG earnings the ATM Oct straddle had a VOL of about 57% that volatility is 68% here despite the higher price. As you know a higher price means more vega left in the options further magnifying how much more pricey the straddle is right now. Let’s not forget that in October, the IV of the S&P 500 was much higher than it is right now as well.
4. From the above graphs one might also notice that there is no front month skew. There is so much expectation of movement leading into the announcements, and so many traders taking bets that ATM and OTM IV's have essentially flat lined from all of the call spreading and put spreading. Essentially, the expectation of movement, and thus trading of call and put debit spreads has forced enough selling pressure on out of the money options to flatten the skew curve. This is a little uncommon, but typically appears in a situation like GOOG's: little time to expiration and large expected movement.
5. Large paper flow continues to buy premium. I reviewed a trade list from LiveVol that shows all the GOOG trades over 150. After reviewing I did not see a lot of premium sellers in these larger trades.
Add the above together and we are looking at a serious straddle price (see below) with a ton of premium in it that I am somewhat afraid to sell.
I will examine the straddle, vs. the weekly's that are being listed tomorrow, vs. the Feb and the March tomorrow during the large group education, that we call the PM pit report. If you are not a member of the email us info@optionpit.com to receive a special 1st month rate. Also, do not forget that I will be speaking for theOptionClub tomorrow, you can register here.
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graphs from LiveVolPro
