Alphabet, Inc. (GOOG.L), Trending Stock Report

Alphabet, Inc. (GOOG.L) is trending in the news and social media as investors brace for an earnings report tomorrow. Social media mentions are up 100% in the last 24 hours. The 1-month implied volatility is near the 1-year high.

The implied volatility of the shortest-dated options is even higher (see page 3). Looking back at the history of GOOG.L around earnings, it looks like the options expiring Friday are mispriced on the expensive side. This means we will take advantage of the situation by using a limited-risk, high-probability credit spread strategy.

This Volatility Term Structure chart shows us the implied volatility of the at-the-money options at each option expiration. This term structure is inverted. Short-term options have higher volatility expectations than long-term options. The highest volatility expectation is shown for those options expiring Friday. High implied volatility means high option prices. This tells us to focus on selling strategies for short-term expirations.

This MDM graph compares the modeled expectations of current options prices (the orange line) to the actual movement of GOOG.L’s stock price over the past year. You can see that the actual behavior (the blue histogram) doesn’t look like the modeled expectations at all. This graph tells us that investors are expecting huge moves. The problem is that the stock price just hasn’t made the kind of moves investors are expecting. That doesn’t mean the stock can’t make those moves, it just means if the stock continues to behave the way it has in the past, the expected moves are highly unlikely.

GOOG.L investors are bracing for an earnings report tomorrow. Because investors are using options to hedge or speculate on the report, the rising demand has pushed options prices much higher. Based on the past movement of the stock price, the options look to be mispriced. This allows us to execute a limited-risk, high-probability credit spread strategy.

Be sure to read the ODDS Online Daily Trade Idea report to get the details of our trade idea for today.