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Google's (GOOG) Q3 earnings miss was made even more dramatic on Thursday as an apparent error by the printing company RR Donnelley (RRD) caused an incomplete version of the earnings statement to be released to the SEC. (Despite a sharp drop intraday, shares of RRD closed down less than 1% on the day and option implied volatility ended the day only modestly higher.)
As for GOOG, at the close of trading the stock was down 8% and the implied volatility of October and November options was also down sharply. To determine whether the market reaction on Thursday was typical, we can compare option bids at the close to some earnings reactions in recent GOOG history. After earnings in January of this year, the implied volatility in GOOG options expiring a month later fell by more than 50%. In April, options at the same horizon saw volatility drop by 27%. In both cases, the stock was trading lower several sessions later, so this wasn't just a question of option bids falling alongside a stock rally. In July, shares rallied on an earnings beat and near-term implied volatility fell 37%.
It is reasonable, then, to expect option premiums to drop sharply after any GOOG earnings announcement. On a relative basis, though, we should regard the November GOOG options as priced higher, post-earnings, than has historically been the case. The November at the money straddle as of Wednesday's close was struck at $755 and priced at about $38.55, for a 29% annualized implied volatility. At Thursday's close, the at the money straddle would have been struck at 695 and, at about $36.70, implied a volatility of about 22.5%. That 22% drop in November implied volatility is well below the normal decline compared with the last several quarters of earnings history.
The fact that GOOG options didn't become as cheap post-earnings as history would lead us to expect is understandable, since the large drop in the shares undoubtedly makes some folks nervous, and since the trading halt and misstep with the SEC introduced some added uncertainty.
However, the initial analyst and manager reaction to the details of the announcement was fairly positive. "Core" search and ad numbers were okay, and most of the blame went to Motorola Mobility, higher currency hedging costs, and lower margins caused by higher than expected Nexus 7 sales. J. P. Morgan (JPM), Barclays (BCS), and Citigroup (C) analysts all described the results as either neutral or as a buying opportunity. I like this situation as an opportunity to sell a November put vertical on the expectation of quieter or bullish rebound trading in the stock over the next few weeks.
Trades: Buy to open GOOG November 650 puts for $4.60 and sell to open GOOG November 660 puts at $6.30.
The position will profit as long as GOOG finds its footing.
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Jared can be followed on Twitter at twitter.com/CondorOptions.