Fri Oct 19, 2007: Exciting Market, Boring GOOG

Despite the big selloff in the market Friday, and a good earnings report from Google, the stock didn't move much either way. Maybe the two factors cancelled each other out.

The October 600 call option we discussed buying a week ago at $4,340 closed at $4,500. Not much excitement there.

But what if GOOG joins the selloff?

Let's compare two put option buys to see which is the better value.

In the table above, the November 650 put and the December 670 put have almost exactly the same amount of time premium.

The November 650 put is in-the-money by (650-644.71) = 5.29 points and the total premium is 24.40 so the time premium portion is 19.11.

The December 670 put is in-the-money by (670-644.71) = 25.29 points and the total premium is 44.30 so the time premium portion is 19.01.

The advantage of the December option is it gives you eight weeks instead of four, with the same cost in time premium.

The advantage of the November option is greater leverage on a percentage basis since the total cost is lower. You can see, for example, it will double if GOOG hits 601.20 at expiration (or any time before). The December option won't double until 581.40.

Another comparison is to consider what happens if we're wrong and GOOG stock shoots up and never comes back. In this case it depends on how far it goes. Above 650 and the November option is worthless. The December option wouldn't go to zero unless GOOG finishes above 670. Of course, if it does there is more money lost per contract.

A third comparison is to estimate what would happen if the stock were to drop a certain distance immediately, say for example $20. From the table we can see that making the November option in-the-money by another $20 would increase its value by about 12.00 and similarly the December option would increase by about 13.20.

Because of this third point, that for a quick move right away I'd gain about the same amount on the December put (slightly more actually) and also have twice as much time to wait for some sort of price drop in GOOG (maybe not a double but at least a profit), I'd choose the December.

The November option is more aggressive and would pay off with higher percentage returns, especially for a very large drop in GOOG.

But since GOOG is a popular successful stock in a powerful uptrend with good earnings, I think it makes more sense to play for a smaller drop (if at all).

Until next time, best of luck with your option investments!