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Earnings Season-GOOG Strategy

 
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PostPosted: Sat Oct 13, 2007 9:41 am    Post subject: Earnings Season-GOOG Strategy Reply with quote

Next week is Oct options expiration week. Some notable earnings next week are: Tue YHOO INTC IBM JNJ WFC DAL; Wed EBAY JPM MO ABT KO; Thu GOOG AMD CY BAC BK LLY PFE WYE SNDK LUV STJ NUE UNP HSY; and Fri MMM CAT HOG SLB HON WB XRX. Moreover, economic reports include: Tue Industrial Production, Capacity Utilization; Wed CPI, Building Permits, Housing Starts, Fed's Beige Book; and Thu Leading Indicators.

Oct options will have huge leverage next week, because of little time value, although implied volatilities will be high before earnings. Some stocks above will make big moves after earnings. So, some Oct options will make huge moves. However, it's a big gamble, although risk can be limited.

GOOG may be an interesting trade next week. The three-year weekly chart below shows GOOG's weekly RSI and ULT are both above 75. The last time they reached those levels, GOOG fell sharply within three months, rising from 430 to 475 initially and then falling to 338. However, the weekly Bollinger Band shows GOOG is more overbought than the last time RSI and ULT were above 75 with GOOG about 40 points above the upper weekly Bollinger Band. Moreover, GOOG's short interest ratio is only 1.7, which is bearish.

Consequently, unless GOOG earnings far exceed expectations, it may fall on the news. YHOO earnings on Tue and EBAY earnings on Wed may influence GOOG. Also, GOOG often falls before its earnings report, on profit taking or uncertainty, which is due on Thu after the close. The implied volatilities of GOOG options should stay high, until earnings are reported. Consequently, it may be best to trade Oct options before GOOG earnings. On Fri, the GOOG Oct 630 puts closed at 14.30, while GOOG closed above 637.

Last week, GOOG rose on Mon, Tue, Wed, and opened high on Thu, from the low 590s to the low 640s. It then fell below 610 on Thu afternoon. The implied volatilities of many of the Oct puts inflated more than enough to offset any time value decay throughout the week. Consequently, if GOOG opens high Mon, or rises early in the week, there may be an opportunity to make a big gain before earnings, e.g. on a 10 or 20 point GOOG pullback. Also, any personal insights on stocks reporting earnings next week may be helpful to make big gains with Oct options, although it may still be a big gamble.

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