We are making a Google (NASDAQ: GOOG) call option play on a couple of news items. One is their announcement on Nexus One phone based on their Android OS. The other is our anticipation of good 4th quarter earnings they will announce middle of January. Granted, the Nexus One announcement is probably already baked into the stock price. But we think there is still some room for the stock to run.
There are some good things happening for Google as well. The stock price target recently got upgraded to $810 by FBR. That is quite big given that the stock price has been on a run lately. In the last 1 month the price has gone from around $585 to $625 which is close to a 7% rise.
There is still speculation in the market as to whether the Google phone will cause any dent in the Apple iPhone sales. We agree with the market that it will not. However, the smart-phone market itself is expanding at a rapid pace and that fact alone provides some market to Google. And there are strong predictions for mobile search to take off in the next 1 – 3 years which again spells good for Google. The bottom-line for Google is that it is not a negative to have the phone. And their bread and butter business of search is intact.
We are entering into a short term out-of-the-money trade by buying the February 2010 $700 call options at a premium of $320 per contract. This means that we would need the stock price to go up over 10% to be on-the-money. However, our expectations are for a modest gain of around 50% in the contract premium at which point we will sell the call options and get out of the trade. Our expected holding period on this trade is under 4 weeks.
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