Large Numbers of Alphabet Call and Put Options Trade Hands After Results

Barchart's Unusual Stock Options Activity (UOA) report on Oct. 26 had huge volume in near-term call and put options for Google stock after Alphabet (GOOG, GOOGL) reported results that missed expectations for Q3.

This can be seen in the table below. It shows that the volume in call options for strike prices and contracts expiring on the weeks ending Oct. 28, Nov. 4, Nov. 11, and Nov. 18 all have huge call option activity.

For example, look at the column that I have circled with an arrow pointing to it, called “Vol/OI.”  This takes the volume of contracts traded for that strike price and expiration date and divides it by the prior open interest (i.e., the number of contracts already open prior to the activity yesterday and today). That shows that the number of new contracts is 14 to 23 times normal.

Look at the first call contract, expiring Nov. 11. It shows that the 4,000 contracts traded at the midpoint price of $2.40 is 23.1 times the 174 contracts open prior to the results yesterday. That means that investors have paid $960,000 (i.e., $2.40 x 100 x 4,000) for GOOG stock call options at the $99.00 strike price, which is less than 2.0% higher than today's price.

That is a very bullish sign since it means that investors believe that in just over 2 weeks (i.e., Days to Expiration or DTE is 16), GOOG stock will be higher than $99.00+ $2.40 (the price of the calls), or $101.40. 

That shows that investors believe GOOG stock will rise at least 4.38% in order for their investment to make money. All in all, there are now over 9,000 new call contracts that believe strongly that the stock will rise.

Put Buyers Are Strong

The same is true for the other call strike prices which range from $99 to $102. There is one tranche of puts at $97 for 10,000 contracts. This shows that many investors are looking for the stock to fall from today's price. But they had to pay $2.26 at the midpoint for those puts, making their breakeven price of $94.88, which is just 2.3% below today's price.

This is a signal that many more put buyers feel strongly that Google stock will keep falling.

What Is Happening with Alphabet

Alphabet reported missed revenue and earnings yesterday. Revenue at $69.09 billion was $1.55 below expectations, according to Seeking Alpha. as well as only 6% higher than last year. In addition, the company's operating margins came in at 25%, compared to 32% last year. These margins were below expectations as its headcount was higher by 12,700 over last year (up 24% YoY).

In addition, its comparable metrics in both its Search and YouTube areas were difficult. YouTube actually had a decline in revenue from $7.2 billion last year to just $7.07 billion in Q3 this year.

Clearly, investors are not pleased with these results. The company is likely going to have to begin cutting overhead or dramatically slowing its growth if revenue continues to drag.

This is likely why investors in the puts had a higher volume than the call volume.

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