Option prices imply a big earnings move for Google

CHICAGO, July 13 (Reuters) - With earnings season heating up next week, look for a big move in Google Inc. (GOOG.O: Quote, Profile, Research) shares in the aftermath of the Web search leader's quarterly financial report, a pair of option analysts said on Wednesday.

Google shares have more than tripled from their $85 August debut and have jumped after each of the company's three financial reports since going public. On Wednesday, they finished at $298.86 on Nasdaq.

"Options are already pricing in a plus or minus 14 percent move for Google's earnings, making outright option buying expensive," Goldman Sachs strategists Maria Grant and John Marshall wrote in their latest Weekly Options Watch commentary.

Goldman Sachs Internet analyst Anthony Noto believes investors should own Google and expects Google to post strong results on July 21. Noto said he prefers to wait until after the quarter to reassess attractive entry points, given the recent rally in the stock.

Google shares soared 15 percent to $172.43 the day after its first financial report as a public company. Shares rose 7 percent to $205.96 after its second report in February, and nearly 6 percent to $215.81 after its most recent report in April.

When investors bid up puts or calls they are positioning themselves for potential stock movement which sends implied volatility higher.

The analysts pegged Google's one month at-the-money implied volatility at around 45 percent, the highest in their universe of large technology stocks.

Implied volatility is a statistical measure related to how much a stock is expected to move up or down on an annualized basis calculated by current option prices.

Expectations for Google's second quarter are generally high since the company, which does not issue forecasts, has consistently crushed analysts' estimates. Some analysts, however, have warned that Google's shares would be punished if its results fall short of Wall Street targets.

Analysts have also noted that the second quarter can be somewhat weaker for Web search advertising -- Google's revenue driver -- since consumers tend to spend less time online during the warm summer months.

The Goldman analysts suggested that bullish Google investors buy call spreads, which would reduce their cost of buying the options while offering an attractive risk/reward.

Investors typically buy calls, which give the right to buy the security within a specified time period, if they expect the stock to go up.

A call spread strategy may be appropriate when the cost of the option or premium is extremely high, as in the case of Google options. By doing a spread instead of an outright call purchase, the investor gives away some of his upside exposure to reduce his initial purchase price.

"We think bulls should buy call spreads $20 wide for attractive risk/reward given our analyst's longer-term positive outlook and expensive call skew," Grant and Marshall wrote. (Additional reporting by Lisa Baertlein in San Francisco)




Option prices imply a big earnings move for Google

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