Is It Time to Buy Call Options on Google (GOOG)?

11/25/2009 12:02 am EST

Focus: OPTIONS

Adam Warner

Author, Options Volatility Trading

In the options world, volatility across the board is as cheap as it has been at any time in the past year, if not the past two years or more in some spots. And after a year of overpricing relative to realized (historical) volatility, we're as close to "fair" value as we'll ever get, too.

So, the value player in all of us would rather net buy options at this juncture, right? Maybe…

Let's look at Google (GOOG) for a minute, which hit a 52-week high recently.

The chart below displays GOOG's 30-day implied volatility (yellow line) and 30-day historical volatility (blue line) over the past six months.


Click to Enlarge

GOOG December options trade at about a 20 volatility clip. January (likely an earnings cycle month) changes hands at about a 23. The further out you go, the pricier it gets. March carries a 26 volatility, and June a 27.

What about realized volatility?

Well, here is a chart showing GOOG's ten-day historical volatility over the past six months.


Click to Enlarge

As you can see, it averages in the high teens or so, with occasional spikes up toward 30. It's worth noting, however, that two of the spikes were simply earnings reactions, at which time the options actually priced in a move.

So what should you do at a time like this?

That all depends on your goals.

If you're bullish on GOOG and you're a longer-term player, it's tough to argue against a straight call purchase, even at the higher volatility.

If you own paper and put it away, the day-to-day volatility (or lack thereof) will not have an enormous impact if the general trend continues. In fact, that's exactly why those March and June options may make even more sense than "cheaper," shorter-dated paper.

For a shorter-term player (of which I am one), I'd just as soon stay away from buying anything here, even at "record" lows.

Every day I own an option that is priced at an implied volatility that is higher than the volatility ultimately realized, l lose money. That money may be real (let's say I buy GOOG straddles) or relative (say I was bullish and bought calls instead of stock).

Of course, no one knows what realized volatility will be between now and the time an option expires, so we need to use a bit of past as prologue to guide us. And the very recent past has not been pretty for GOOG options holders.

As cheap as the options look, I'd still rather wait to see the volatility trend turn up before jumping in.

Time is money, and I would prefer missing the bottom and catching the options trend right rather than throwing my money out there and crossing my fingers. 

By Adam Warner of DailyOptionsReport.com

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