Options Update: Are Google Options Traders Buying September Puts?

September 17, 2008
Joseph Hargett

For GOOG, Merrill slashed its target from $711 per share to $574 per share. Looking at data from Thomson Financial, the stock could be at risk for additional price-target cuts, as the current average 12-month price target for GOOG rests at $634.04 per share – a premium of more than 50% to the stock’s current trading range near $422 per share.

Options traders wasted no time following the announcements, jumping on GOOG’s puts with a fervor. In fact, more than 20,900 of these bearishly oriented options have crossed the tape so far today, more than doubling the stock’s average daily put volume and placing GOOG on our Intraday Volume Explosion List. However, it was the more than 6,000 contracts that traded on GOOG’s soon-to-expire September 420 put that caught my eye today.

Google volume details

Looking at the chart above, you can see that the vast majority of today’s volume changed hands at the ask price on GOOG’s September 420 put. This ask activity, combined with the fact that volume on the option has outstripped open interest, suggests that traders are buying (to open) front-month GOOG puts. For today’s put-buying example, I’ll be using the combined block of 294 contracts that traded at 11:33 a.m. Eastern time – all of which traded at the same time on the same exchange, hinting that they could be part of a larger position.

The Anatomy of a GOOG Put Position

Diving into today’s put-buying example, the hypothetical trader purchased 294 GOOG September 420 puts for $5.30, or a total outlay of $155,820 — ($5.30 * 100)*294 = $155,820. For this trade to reach breakeven, GOOG would need to fall about 2% to $414.70 per share. We arrive at this by subtracting the cost of the option ($5.30) from the strike of the purchased 420 put ($420 – $5.30 = $414.70). The total loss for this position is limited to the initial investment of $155,820.

If the trader has placed his bet in the October or December series of options, this trade would look considerably attractive given the stock’s poor price action and heavily bullish investor sentiment. The drawback to an October 420 put is that the trader would have needed GOOG to fall nearly 7% to $394.80 ($420 – $25.20 = $394.80) due to the current price tag of $25.20 for the option. The total cost of the position would have ballooned to $740,880 — ($25.20 * 100)*294 = $740,880.

Clearly, the trader is opting for a less expensive option and a smaller percentage move to reach breakeven by shortening the time frame. The risk is the shortened time frame, as GOOG needs to drop quickly in order for the trader to realize a profit with September options expiring at the end of the week. Let’s see if the stock’s sentiment or technical backdrops provides any drivers or roadblocks that could effect the trade.

Getting Technical

Looking at a technical picture for GOOG, it appears that a bearish position on the shares is a smart move. The stock has plunged more than 35% so far this year, taking out key support at the 500 and 450 levels along the way. Furthermore, the equity continues to struggle with resistance at its declining 10-day and 20-day moving averages, which have applied additional pressure on GOOG since late-April. However, the shares appear to have encountered long-term support at the 420 level – site of today’s hypothetical trade. GOOG has not closed a month below this level since September 2006, so it could take a sizeable move in the shares (or the market) to pressure the stock below this support level.

Daily chart of Google since April 2008 with 10-day and 20-day moving averages

The Sentiment Drivers

The sentiment backdrop for GOOG looks promising for a put position on the shares. Specifically, Zacks.com reports that 18 of the 20 analysts following GOOG rate the shares a “buy” or better, leaving plenty of room for potential downgrades on the stock. Furthermore, as mentioned above, there is room for additional price-target cuts, as the current average 12-month price target for GOOG rests at $634.04 per share.

However, the options configuration offers up a mixed view. The stock’s Schaeffer’s put/call open interest ratio (SOIR) of 0.43 looks promising, as it indicates that calls more than double puts among near-term options. What’s more, this ratio ranks below 88% of all those taken during the past year, hinting at extreme optimism from the group that could unwind in a flurry of selling pressure.

The problem lies in the stock’s open interest configuration. Currently, peak put front-month open interest resides at the 420 strike, totaling roughly 6,000 contracts. This is a problem because heavy accumulations of put open interest can create ballast for a stock during expiration week. The idea is that as GOOG approaches the 420 level, market makers (i.e. those that sold the puts to investors) need to unwind their hedges, thus creating additional buying pressure. This situation disappears in the October series of options, where peak put open interest shifts to the 400 level. As such, GOOG has a better chance of a downside breakout next week following September options expiration.

Sentiment indicators for Google

The Verdict?

Personally, I kind of like the idea of a September 420 put on GOOG – assuming you entered the position earlier in the day. The option has since jumped to an ask price of $9.00, increasing the move needed to reach breakeven. However, as I was writing this article, GOOG breached the 420 level, indicating that a larger downside move could be in the cards for the shares. If the stock closes below 420 today, it could be a sign that the 400 level could be within reach before week’s end, creating a tidy little profit for today’s hypothetical put trader.

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Options Update: Are Google Options Traders Buying September Puts?

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