Google Q4 Results Give Options Traders A Bit Of Wiggle Room

11:06 AM ET 1/20/10 | Dow Jones

By Tennille Tracy

NEW YORK (Dow Jones)--When Google Inc. (GOOG) reports its quarterly earnings, it often creates a headache for traders who buy and sell its options. But not this month.
Google's next quarterly report, scheduled for Jan. 21, will represent the only time this year the Internet giant reports earnings well before options expire. After that, Google will probably follow historical precedent and release its earnings just one day before options expire.
This once-a-year occurrence presents both an opportunity and a challenge for options investors, depending largely on what strategies they employ.
For at least the last four years, Google has elected to release its first, second and third-quarter earnings just one day before options expire. It breaks tradition only on fourth-quarter earnings, when it reports results well after January options expire and well before February options are slated to end.

In the quarters when Google reports on the day before expiration, it often presents a challenge to traders. That's because the timing forces them to react quickly to the performance figures as soon as they are released, giving them just one trading session to cash in on profitable bets and to unwind out of bad ones.
Investors face a similar dynamic when trading options on other companies that report so close to expiration. Intel Corp. (INTC), for example, released fourth-quarter earnings on Jan. 14, just one day before the January contracts expired. But the steep price of Google's options makes the trading a particularly risky game. With the company's stock trading near $580, just one of the February $600 call options cost more than $1,000.

William Lefkowitz, chief options strategist with vFinance Investments Inc., recalls a time several years ago when he sold "call" options in Google, thinking the stock would stay below a certain price following earnings. When Google announced better-than-expected results, the stock soared and quickly blew past that price, forcing Lefkowitz to scramble to back out of the position in a matter of hours.
"It was shocking to me because, with just one day [before expiration], I didn't think I could lose," Lefkowitz said. "I thought it was like printing money, but I found out it wasn't that easy."
Because Google deviates from this pattern just once a year, Lefkowitz says it presents a rare opportunity for investors to speculate on the company's results without feeling the pressure of the pending expiration.
"When I told this to my clients recently, they said, 'What? ... You told us never to do that,'" Lefkowitz said. "Then I explain that it's just this quarter that it happens."

Interestingly, there are some investors who actually prefer to trade Google options when the company releases its results so close to expiration. That's because, at that point, a lot of the factors that influence the price of an option -- volatility and time decay, for example -- no longer play a big role.
In other words, the only things that will affect the price of the options are Google's quarterly performance and the subsequent moves in its stock price.
"I personally think this helps the retail interest in the name," said Marc Liu, head trader of the market-making firm Integral Derivatives. "It takes away some of the complexity of it. You don't need to understand the dynamics of post-event volatility."