Alphabet Inc (GOOGL) Traders Take Aim at Lofty Pre-Earnings Volatility Expectations

Alphabet Inc (GOOGL) tapped a new all-time high ahead of tomorrow's quarterly earnings event

Jan 25, 2017 at 11:35 AM
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Alphabet Inc (NASDAQ:GOOGL) is due to report earnings before the open tomorrow, but the stock has already seen its fair share of excitement this week. After receiving receiving a solid outlook from Barron's on Monday, the shares are fresh off a new record high at $854.50 today, last seen 0.1% higher at $850.74. More analysts are weighing in, too, with Deutsche Bank increasing its price target on GOOGL by $10 to $1,090, and Cantor Fitzgerald expressing expectations the company will meet or beat earnings estimates. And while optimism toward the shares is nothing new -- 86% of analysts maintain a "strong buy" rating -- it appears one options trader took the road less traveled to take advantage of elevated earnings volatility expectations.

Drilling down, peak open interest among all the stock's options resides at the weekly 1/27 870-strike call, with 3,050 contracts outstanding. Data from the major options exchanges confirms that a large number of positions at this strike were sold to open recently. Considering the stock has never traded this high and implied volatility on the call is currently docked at 60.2%, it's likely call sellers are betting GOOGL will fail to reach the $870 mark by this Friday's close -- when the weekly option expires -- allowing the calls to expire worthless, and the traders to pocket the attractive pre-earnings premiums they collected.

More broadly speaking, near-term options traders have rarely been more call-skewed toward GOOGL than they are now. The stock's Schaeffer's put/call open interest ratio (SOIR) of 0.70 ranks just 3 percentage points from an annual low, meaning call open interest easily outweighs put open interest among options in the front three months' series. This skew is especially prevalent in near-the-money strikes, per GOOGL's gamma-weighted SOIR of 0.13.

Historically speaking, it's not hard to see why analysts are so upbeat on GOOGL ahead of earnings. In fact, the security has made a move to the upside in the session after reporting in seven of the past eight quarters. Overall, the shares have averaged a one-day swing of 5% in either direction in the last two years, and options traders are currently pricing in a slightly wider 5.7% swing move for tomorrow's trading.

Technically, there's no denying GOOGL has been a solid performer of late. The shares have added 7.5% so far in 2017 alone, after bouncing from support at the 10-week moving average at the end of December. However, there's certainly reason for bulls to be cautious. Alphabet Inc's (NASDAQ:GOOGL) 14-day Relative Strength Index (RSI) of 72.3is already in overbought territory, indicating the shares could be due for a breather before long. Not to mention, GOOGL has historically been among the worst first-quarter performers.

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