Google Pullback Opportunity
(GOOG) - Get Report
has pulled back from its new 52-week high at $630.00 to essentially fill the $50.00 gap higher it created on October 15 after its stellar third quarter report. And that means it's time for another at-the-money bull call spread in this "monster of the web" whose stock I expect to be back over $600.00 in the next three months. My
worked out great as the stock found legs below $500.00 in September and began a steady ascent before rocketing higher after earnings.
Unfortunately, I wasn't paying close enough attention last week for another prime entry while the stock was below $560.00 But our John Carter was all over it on friday around $570.00 with an idea to buy the December 550 calls for under $25.00. Here's another way to play GOOG with somewhat similar risk/reward, giving you more time in case the stock struggles with the $580.00 level, but obviously sacrificing upside above $600.00:
Trades: Buy to open GOOG March 550 calls for $48.50 and sell to open GOOG March 600 calls at $23.00.
The net debit is $25.50, or better.
Why might GOOG struggle here? The gap down on November 30 was interesting for several reasons. There were at least three news events that stood out:
¿ Stocks opened lower because of the European debt crisis
¿ GOOG was in talks to buy Groupon
¿ European regulators opened an anti-trust investigation of GOOG activities
I think we can ignore the first two fundamental stories, and might give a passing interest to the third -- except for this fact about the November 30 selloff: GOOG sold off on above average volume of 7.1 million shares and has not recovered the gap down from $580.00, only drifting higher for the next three days on low volume, while the S&P launched from 1185 to 1225, even after disappointing jobs numbers.
This spells some institutional selling to my eyes. I'm not sure why they are selling, but it is the institutional investors -- mutual funds, pension funds, hedge funds -- that move GOOG and we live and die in the short term by their aggregate actions. Just because I think GOOG is an earnings-growth machine that is fairly valued, doesn't mean a thing. It's what the big money thinks and does that matters. And I don't try to gauge this stuff in short time frames. I try to assign risk/reward probabilities based on what I think they will do over the next three to six months around big round numbers.
I think that in the aggregate they will be buyers of the stock around $550.00 after this temporary nervousness -- whatever the cause -- sorts itself out. The chart is telling me we might get another chance to buy this spread near $560.00 and that's why we don't need to rush and over pay right now. But if you think we've seen the bottom for December and January and don't want to miss the opportunity, then by all means, pay up to $26.00 with stock around $570.00 and up to $28.00 if we get a surge above $580.00 this week.
The big picture here is that if you agree that GOOG will be over $600.00 in the first quarter of 2011, don't bother quibbling over a better entry for the spread that might save you only $1.00-$3.00when you can just get in now to "set it, and forget it" for the next three months and still have a chance to make high double digits on your money. We will know we were wrong if GOOG collapses below $550.00 in the next few weeks. Today, I am making a conservative bet against that event.
At the time of publication, Kevin Cook held no positions in the stocks or issues mentioned.
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