Trading on Corporate Earnings News: Profiting from Targeted, Short-Term Options Positions by John Shon & John Shon

Author:John Shon & John Shon [Shon, John]
Language: eng
Format: mobi
Publisher: Pearson Education
Published: 2011-04-14T16:00:00+00:00

Example 8.1: Volatility Collapse (NASDAQ: GOOG)

Google (NASDAQ: GOOG) is a major technology company with roughly $150 billion market capitalization; it’s a powerhouse. In July 2010, with the ever-changing dynamic of the Internet ad business, it’s no wonder that the market was closely watching and anticipating Google’s upcoming earnings report. Anxiety about Google’s performance—and the implications for the technology industry and the economy as a whole—was building to a crescendo.

After market close on July 15, 2010, Google announced earnings for its second fiscal quarter. It reported EPS of $6.450, missing the consensus forecast of $6.518 by $0.068, or 1.0%. As a result, Google’s shares slumped from the previous close of $494.02 to a new close of $459.61, a decline of 7%. Options markets reacted similarly. The August 2010 490 calls collapsed from $22.18 to $5.10, close to close. The same strike/month puts increased from $18.50 to $34.80 over the same period. Although Google’s stock price was punished, much of the anxiety, anticipation, and uncertainty about the results was resolved. This resolution of uncertainty is reflected in the pattern of its implied volatility.

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