An Alluring Google Play

 | Mar 20, 2012 | 9:30 AM EDT  | Comments
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Stock quotes in this article:

goog

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msft

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yhoo

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mmi

Google (GOOG) is simply Googlicious around earnings, and that time is upon us once again. Before the report, anticipation tends to build for a big move, and that move usually occurs, with winners and losers on both sides of the tape. There are many ways to game Google, and in a month the company will share with us their results from the first quarter. I, for one, can't wait.

I've traded Google fairly well around earnings, though not perfectly. In October 2010, right here on Columnist Conversation, I posted a great trade setup that turned into a lights-out 1,000% winner. I passed on it the last couple of times, as the odds weren't in favor of my typical play. However, I'm sniffing around here for a big trade next month.

Google shares have lagged the market badly this year, down some 3% for the year as the broad market has gained 8% or more. Moreover, such competitors as Apple (AAPL) and Microsoft (MSFT) are up by far more. Direct competitor Yahoo! (YHOO) is off about 6%, but that's due in part to some other issues.

So, what's the reason for the lag in Google? It could be the overhang from the proposed Motorola Mobility (MMI) acquisition, or perhaps some flatness in advertising spending. I don't believe that second reason, though. Perhaps there are better names, better trends and better charts, and Google is just being ignored. But that is about to change.

Google swallowed up YouTube a few years back for a pretty penny. At the time, the company had not yet figured out how to monetize it, and with so many other initiatives (Android and mobile search among them) it seemed they were lost in the shuffle.

Now, I'm a big user of YouTube -- yes, I sit there with my headphones on, listening to music videos -- and what are we seeing now? Ads, and lots of them. These aren't just those annoying little embedded pop-up boxes that you have to close. We are being forced to watch an advertisement for just about every YouTube video, even if it's only five seconds long. Further, I'm sure the ones that don't have ads will have them soon.

How much is Google making from the ads? We can't know that right now, but it's probably a lot. In any case, the fact that Google is finally monetizing YouTube is a big plus. The growth of the site is staggering, and I suspect it will be leveraged into some sort of streaming-movie and television service sooner rather than later.

The other big profit driver for Google would be mobile search. Management has been talking about it for months, and now it appears to be kicking into gear. Last quarter saw sequential growth in this segment, and the Android phone provides an excellent platform for ads and search. I expect to see good numbers, once again, from this high-growth profit driver.

We normally see elevated volatility around earnings season, as the market naturally expects a big move and excitement builds. For Google, could that move amount to $70? It's not unusual to see implied volatility at 5x the historical average. Now we are seeing implied volatility around the low 30s, and that should climb steadily over the next several weeks. Google earnings are usually out the day before options expiration, which in this case would mean April 19. (We'll soon find out if that date is correct.)

If Google earnings are strong or "talked-up" over the next few weeks, the stock should get a nice pop. It is currently threatening a break out and gap-fill at $639. Beyond that is where it would get interesting. Take a look at the chart below.

Google (GOOG) -- Daily
Source: StockCharts.com

I'm looking at April calls with strike prices of $675 and up to $700 for a play -- perhaps a calendar spread or a vertical. I'm not putting anything on just yet, but that implied volatility will start to build soon. Last Wednesday the $700 calls were at $1.70 and now they are $4 -- and, all the while, the stock barely moved. This may play into a long call strategy. I'll have more on this later.

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