Wednesday, July 14, 2010

GOOG, What Volatility Bid Up?

In usual fashion Google is slated to report earnings on Thursday night, one day prior to earnings expiration. In Monday's Earnings Season Primer I made the assertion that option premiums get bid up (causing a rise in volatility) into earnings as market participants aggressively buy options to game the gap. This typically causes a notable discrepancy between implied and historical volatility levels just before the announcement.

So that's what GOOG has going, right?

Wrong.

A glance at GOOG's vol chart shows implied vol and historical (20 day) virtually inline. Notice how the last four earnings announcement saw the IV-HV difference peak pre-earnings (white arrows). This go around... not so much. What gives?
[Source: Livevol Pro]

Well, as noted yesterday, volatility has come in quite a bit across the board concurrent with the markets rally this week. That could certainly be one factor influencing GOOG's vol decline over the past few days.

Maybe its merely a reflection of the options mart not expecting much movement out of this search engine behemoth. I had that thought myself, but let's play devils advocate and throw out one more idea-

Keep in mind the IV-HV difference involves two variables, not one. Perhaps it's not so much that implied vol is low as much as it is historical volatility being high. After all, IV has sat around 32% in all of the last four earnings announcements for GOOG, making its current value pretty typical around this time. Since GOOG so conveniently reports right before expiration, it's easy to determine the expected move using the front month straddle. Right now the July 490 straddle is trading around $23- basically pricing in a 5% move.

I've already sung their praises in my What Will They Think of Next post, but allow me to once again express my excitement with Livevol Pro's volatility tools. I consider their platform a staple when it comes to analyzing earnings plays. If you haven't checked them out you can access their site using the advertisement on the side of my blog.

Disclosure: This should go without saying, but from the redundancy department of redundancy, LiveVol Pro is an advertiser on Tyler's Trading.

For related posts, readers can check out:
The Cycle of Implied Volatility
Finding Volatility
GOOG, I'm Feeling Lucky

1 comment:

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