Google Stock Price Too Expensive For You? Try Options.
Investing in a stock generally requires you to pay the share price , multiplied by the number of shares bought. If you wanted 100 shares of Google ( GOOG), it would cost around $57,600 (100 * $576). However, there is an alternative method that requires less capital: options. This is done by using "in the money" call options that mimic the movement of the stock. The deeper in the money the call option - meaning the closer the delta is to 1- the better the option price will track the stock’s movement. ( To learn more about options see our Options Basics Tutorial.)
There are 12 exchanges in the US that allow investors to trade options, with Chicago Board of Options Exchange (CBOE) being the largest.
Take a look at the option chain of Google taken from Nasdaq as of September 3, 2014. The option is an American call option.
If you have a short-term investment horizon, you could probably take a call option expiring on October 18 of 2014 as shown in the table above. Each option represents 100 shares of Google. The strike price is the price at which you have the right but not the obligation to buy the stock. The price you pay to have this option is the premium price or the last price. As the strike price decreases, the call option is deeper in the money and the premium also increases. The volume, i. e. the number of option contracts traded, affects the bid-ask spread: the higher the volume the lower the bid-ask spread. The lower the bid-ask spread, the more savings on transaction costs for the investor.
Say you buy the 520 Strike Google option at the ask price of $61.2, the breakeven price then becomes $581.2. On September 3 of 2014, the stock was trading at around $575. If the stock stays at $575 until October 18 of 2014, the option price should decline to $55 as the strike price ($520) plus the premium ($55) would then equal the stock price ($575) , thus cancelling any arbitrage opportunity.
Since the delta of the option is 1, any change in the stock price should move the option price by the same amount. For example, if the stock price moves to $600 at expiry, the option price would become $80 ($600-$520), for a gain of $18.8, which is $6.2 less than the $25 gain for the stock. The $6.2 represents the time value of the option which would decay eventually to zero at expiry.
Options Provide Buying Opportunity & Protection.
Another benefit of investing in Google or any other company using options is the protection an option carries if the stock falls sharply. The fact that you don't own the stock but only the option to buy the stock at a certain price protects you if the stock takes a plunge. This is because you will only lose the premium paid for the option instead of the actual value of the stock. Say you hold 100 shares of Google and they fall sharply from $575 to $100. This represents a loss of $47,500. However if you own a call option of 100 shares of Google you will only lose the premium paid. If you paid $61.2 per share for a call option of 100 shares of Google, you will only lose $6,120 versus $47,500 .
Longer-term options are relatively more illiquid than shorter-term options and therefore the transaction costs in the form of bid-ask spread would be higher. Figure 2 shows the number of trades for call options expiring in June 2016 are less than in the March 2015 expiry, which is less than the October 2014 expiry. Therefore, it becomes quite expensive and difficult to invest in a stock using options for the long term. One alternative is to roll over the options at each expiry, but this would also increase transaction costs in the form of higher brokerage fees.
For some companies and other securities, there are also mini-options for which the underlying is 10 shares instead of 100. This is useful for smaller investors and for hedging odd lots of a particular stock, i. e. not in multiples of 100. Unfortunately, the volume in these options is not high and mini-options are not as common as regular options.
Using options is a cost effective way to gain exposure to a stock without risking a lot of capital and still being protected on the downside. One of the main drawbacks is the liquidity of the option contract itself. If you are an investor interested in investing in companies with a high stock price (i. e Amazon (AMZN), Tesla (TSLA) or Google) without tying up too much capital, options might be the right answer for you.

Google call options trading

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Call Option.
A call option is an option contract in which the holder (buyer) has the right (but not the obligation) to buy a specified quantity of a security at a specified price (strike price) within a fixed period of time (until its expiration).
For the writer (seller) of a call option, it represents an obligation to sell the underlying security at the strike price if the option is exercised. The call option writer is paid a premium for taking on the risk associated with the obligation.
For stock options, each contract covers 100 shares.
Buying Call Options.
Call buying is the simplest way of trading call options. Novice traders often start off trading options by buying calls, not only because of its simplicity but also due to the large ROI generated from successful trades.
A Simplified Example.
Suppose the stock of XYZ company is trading at $40. A call option contract with a strike price of $40 expiring in a month's time is being priced at $2. You strongly believe that XYZ stock will rise sharply in the coming weeks after their earnings report. So you paid $200 to purchase a single $40 XYZ call option covering 100 shares.
Say you were spot on and the price of XYZ stock rallies to $50 after the company reported strong earnings and raised its earnings guidance for the next quarter. With this sharp rise in the underlying stock price, your call buying strategy will net you a profit of $800.
Let us take a look at how we obtain this figure.
If you were to exercise your call option after the earnings report, you invoke your right to buy 100 shares of XYZ stock at $40 each and can sell them immediately in the open market for $50 a share. This gives you a profit of $10 per share. As each call option contract covers 100 shares, the total amount you will receive from the exercise is $1000.
Since you had paid $200 to purchase the call option, your net profit for the entire trade is $800. It is also interesting to note that in this scenario, the call buying strategy's ROI of 400% is very much higher than the 25% ROI achieved if you were to purchase the stock itself.
This strategy of trading call options is known as the long call strategy. See our long call strategy article for a more detailed explanation as well as formulae for calculating maximum profit, maximum loss and breakeven points.
Selling Call Options.
Instead of purchasing call options, one can also sell (write) them for a profit. Call option writers, also known as sellers, sell call options with the hope that they expire worthless so that they can pocket the premiums. Selling calls, or short call, involves more risk but can also be very profitable when done properly. One can sell covered calls or naked (uncovered) calls.
Covered Calls.
The short call is covered if the call option writer owns the obligated quantity of the underlying security. The covered call is a popular option strategy that enables the stockowner to generate additional income from their stock holdings thru periodic selling of call options. See our covered call strategy article for more details.
Naked (Uncovered) Calls.
When the option trader write calls without owning the obligated holding of the underlying security, he is shorting the calls naked. Naked short selling of calls is a highly risky option strategy and is not recommended for the novice trader. See our naked call article to learn more about this strategy.
Call Spreads.
A call spread is an options strategy in which equal number of call option contracts are bought and sold simultaneously on the same underlying security but with different strike prices and/or expiration dates. Call spreads limit the option trader's maximum loss at the expense of capping his potential profit at the same time.
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Buying Straddles into Earnings.
Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]
Writing Puts to Purchase Stocks.
If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]
What are Binary Options and How to Trade Them?
Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]
Investing in Growth Stocks using LEAPS® options.
If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]
Effect of Dividends on Option Pricing.
Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]
Bull Call Spread: An Alternative to the Covered Call.
As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]
Dividend Capture using Covered Calls.
Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]
Leverage using Calls, Not Margin Calls.
To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]
Day Trading using Options.
Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]
What is the Put Call Ratio and How to Use It.
Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]
Understanding Put-Call Parity.
Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]
Understanding the Greeks.
In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as "the greeks". [Read on. ]
Valuing Common Stock using Discounted Cash Flow Analysis.
Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]
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Call Options Or Put Options On Google (GOOG)?
Google (GOOG) shares are on the move today. The world’s largest internet search engine is making waves after third quarter earnings were released after close yesterday.
GOOG shares are trading at $980.45, up a whopping 10.3% today. The stock’s up 54% from the 52-week low of $636.00 and is currently 6% higher than the previous 52-week high of $928.00.
Is this an opportunity to buy call options on GOOG due to the company’s better than expected third quarter results? Or should you buy put options on GOOG because advertisers’ cost-per-click is still on the decline?
The bulls make a convincing argument…
GOOG surprised investors by posting much better than expected third quarter earnings. The company seems to have been able to position itself to take advantage of growing Internet usage on mobile devices.
In fact, Google posted a 23% increase in revenues related to its interest business. The revenues gains were driven by a 26% increase in total amount of paid clicks.
Moreover, GOOG’s adjusted net income came in at $10.74 per share. That’s well above the $10.34 analysts expected. It’s hard to argue with revenues and profits both above expectations.
But the bears have a compelling case as well…
Despite higher revenues, GOOG is still dealing with eroding cost-per-click (what the advertisers pay). In the third quarter, average cost-per-click dropped another 8%.
GOOG was only able to increase revenues due to a higher number of total clicks. But, that kind of volume may not be sustainable – especially if cost-per-click keeps declining.
What’s more, the company’s purchase of Motorola continues to be a drag on earnings. Motorola’s operating losses were $248 million this quarter, up from $192 million a year ago.
So is GOOG’s better than expected third quarter a reason to bet on the stock going higher, or are investors going to be disappointed with the company’s declining cost-per-click?
If you think the bulls are right, take a look at buying the GOOG November $1,050 calls for around $2.00.
If you think the bears are right, take a look at buying the GOOG November $900 puts for around $1.75.
Yours in Profit,
About the Author (Author Profile)
Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also editor of our dynamic theme-based options trading service, Advanced Options Adviser, and one of the key analysts behind the highly successful Options Trading Wire.
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