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Google Gambling: The Worst Odds on Wall StreetBy Jeff ClarkThursday, October 18, 2007 Las Vegas is no match for this...
When it comes to gambling, Sin City runs a distant second to Wall Street. And the speculative fever is running high on the street today.
Google (GOOG) announces earnings after market close today. That alone is a recipe for volatility. But when you have an earnings announcement combined with tomorrow's option expiration, well, even Father Flannigan would have a tough time resisting the urge to make a wager. And the bookies are loving it.
Consider this...
Google closed yesterday at just over $633 per share. The October 640 calls, which give buyers the right to buy Google at $640 per share, and expire tomorrow, cost $14. In order to make money on this bet, Google needs to be above $654 per share on Friday afternoon. In other words, anything less than a $21 rally in the stock and this bet is a loser.
Betting on the downside is equally as expensive. The Google October 630 puts, which give you the right to sell the stock at $630 per share, are trading for $15. This bet is only profitable if the stock falls below $615 by Friday afternoon. So gamblers need an $18 decline in GOOG in order to break even on this bet.
Trading these options is a horrible bet no matter how bullish or bearish you are on Google. Not only does the stock have to move in the right direction, but it also has to move enough to cover the "point spread," to make up for the price you're paying for the option.
On the other hand, the bookies... I mean, option market makers... who take the other side of these bets profit as long as GOOG stays somewhere between $601 and $669 (the combined option premium of the call and the put is $29). Somehow, I like their odds better.
But here's the really crazy part...
The Google October 670 call options are trading for almost $5. Speculators buying this contract only profit if GOOG jumps above $675 per share – a gain of $42 – by Friday afternoon. The October 590 puts are trading at $4, and require Google to drop $47 to turn a profit.
You're probably thinking that nobody would be crazy enough to make those bets. Funny thing though, volume on all of Google's October option series was way above normal yesterday.
It turns out that there are a lot of crazy gamblers in this world. And they're not all in Vegas.
Best regards and good trading,
Jeff Clark
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