GOOGL Stock Options Have Large Unusual Activity

Barchart's Unusual Stock Options Report (USO) for Wednesday, Nov. 9, shows that GOOGL stock has had a good deal of volume. This indicates investors are betting on huge moves in the stock over the next two or three months. It could also mean that investors are becoming more bullish on the stock, especially if becomes more volatile.

A screen of the USO activity in GOOGL stock shows the put and call options for the period ending Dec. 16 have been especially active, even though there are just 37 days to expiration. For example, at the $80 strike price, which is well below today's price of $88.48 for GOOGL stock, an investor bought over 40,500 calls. At the same time, they also bought 40,607 put options at the same $80 put price.

The price paid for the calls was $10.13 at the midpoint and the price paid for the puts was $1.25. Here is what could possibly be happening here. The investor is bullish on the stock and bought the deep in-the-money calls. They likely also sold put options at the same strike price to help defray the cost of the bullish call options investment.

For example, the calls have an intrinsic value of $8.48 (since the $88.48 stock price at $88.48 is $8.48 higher than the $80 strike price). But the investor paid $10.13 for the call contracts or $1.65 over the intrinsic value. So, by selling the $80 put contracts at $80.00 for $1.25, the investor covered almost all the cost of the bullish investment, except for $0.40 per contract (i.e., $1.65-1.25).

That effectively means that the 40,500 call contracts probably only cost the investor 40 cents, on a net basis, or $1.62 million (i.e., 40,500 x 100 x $0.40). That is a huge leverage position on effectively 4.05 million shares of GOOGL stock.

This is an effective way to essentially take a large upside position in GOOGL stock, even if the moves could be volatile over the near term.

GOOGL Stock Looks Cheap Here

This is indicative that institutional investors consider the stock a bargain here. For example, GOOGL stock is off over 9% in the last month and down 21.5% in the last 6 months. 

As a result, its multiples are now very cheap. For example, GOOGL stock trades for just 16.5x forward earnings estimates for next year. This is well below its average multiple of over 27x in the last five years.

In other words, large buyers of GOOGL stock think it's a good bet to take a long position by buying in-the-money GOOGL calls and paying for them by shorting puts at the same strike price.

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