Tuesday, January 16, 2007

Anyone Else GOOGLY for GOOG?

Why am I GOOGLY over ?

I did not want to resort to the "bandwagon" approach to option trading but I just can't resist. I must warn fellow "swingers" that this trade falls outside of the typical disciplined longer term approach that I have posted on the jungle.

But before you all pass judgment please hear me out. People like Cramer from thestreet.com and Mad Money have also been getting awfully Googly about GOOG. Did we miss the major move or is a predicted breakout above 513 (All time high) about to happen?

I would say that in light of earnings coming up the first week of Feb that the euphoria might be well deserved. Given that GOOG has run from the a 452 low as of 12/21 to its current price of 513 high as of this post, you'd be right in thinking that I've lost my trading mind. In my defense, one can't help think that recent analyst price targets have been almost self-fulfilling prophecies thus far. The analysts' targets have ranged from the 415's to 650 with a mean of 550 or so.

Alright, fundamentals are difficult to guage on GOOG and morningstar's fair value estimate is 315 (only about 200 below current prices) does not produce any warm and fuzzies for the fundamentalist. But then how can one even get a pulse on the true earnings growth potential of this pervasive and obiquitous search giant.

I hope that I've given enough downside explanation specifically by the fact that we are at technical resistance levels to make this trade.

So what about the justifications for this trade consideration and how to play?

IV has been rising as it typically does up to earnings anticipation and that bodes well for premiums and will only inflate them even more as the underlying stock price moves higher from these extraordinary levels.

In addition, the latest report posted today about both YHOO's and GOOG's U.S. web search market share that has increased only fosters added bullish sentiment/fervor/fever etc.

So what to play? I looked at the Feb calls and they came in overvalued as to the pricing model's theoretical fair value so I looked at the Mar calls and I found that surprisingly the MAR 520 Calls show about a 1.00 below TFV currently trading around $26.00/contract. Now that does necessarily mean that these are the best options but to me it gives greater piece of mind knowing that I'm definitely not overpaying at these levels.

These Mar 520 Calls carry a .50 delta which is at a moderately rising IV level of 33% which is slightly below ATM IV levels and below Feb call levels of 38%. BTW, previous pre-earning IV levels reached the low 40 levels then dropped like a rock. Having said that this play is a momentum play into earnings and if the underlying has risen sufficiently profit taking can be the rational reaction prior to earnings.

If you want to play the potential gap up move on earnings that is something you'll have to grapple with at that point.

One last thing, I'm certainly scaling into this position and would expect any kind jungle "swinger" out there to rationally talk me down from this GOOG bandwagon.

Stay tuned for more about my GOOG position.

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