Monday, May 31, 2010

Google Play

Around 2/28/2008 GOOG's 50-day MA fell below the 200-day (price: 473). Over the next 19 days the stock lost about 7% (439) before going on a 44 day run to 600 (+37%, including an earnings event in April).

On 5/27/2010 it looks like the 50-day has once again dropped below the 200 day, usually a bearish sign. However, if GOOG we're to repeat the price performance from 2 years ago, it could be setting up nicely for a contrarian play. Using the price on the May 28th close of 485, and similar price action this time around, a drop to 450 is possible (around 6/15), and then a run to 615 by July 29th. August options are not available, so using July options as of Friday's close, and assuming most of the run this time around will be captured by the July earnings event (and the earnings release falls before options expiration, which they usually do with GOOG), this has the following profit potential per $1000 invested:

This analysis would recommend the 560 to 580 strike range (a paltry 1,700+% gain). The July 560, 570 and 580 calls closed at 3.32, 2.50 and 1.75, respectively. These actually seem pretty cheap considering the VIX is still rattling around 30+. It would be nice to see volatility fall before getting into this position, but not at the expense of any upside on GOOG if they've already turned the corner. If the volatility remains high this may be a good straight stock play but you lose the leverage and eat up margin.

Now, it's obviously a fool's errand to try and time 37% moves in stocks over a month and half timeframe, but in this case you would only need to be right once every 18 times in order to break even. If you were right, say, only 1 in 10 times you are still making 80% a year....

So anyway, this seems like a relatively good risk/reward, as far as GOOG goes in my opinion. Obviously the lower strikes are 'safer.' Even without the herculean run up to 600+, the 520 calls are 10.50 and would "only" need GOOG to run to 542 in order to double in value, and still has the potential to turn into $9,000 if the run-up were to occur. July might not be far enough out and this position may need to be rolled into August during a good bull run but those are good problems to have.

I was looking to scale into this position during the first week or two of June. I've also been looking at C, with Bill Ackerman's big surprise call-out and all, but at $114 B Market Cap... dunno... really hard to imagine this thing back at $300 B or more any time soon, but maybe worth scaling into a straight stock position in the next several weeks as a long-term hold.

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