Google stocks debut with a bang

Doris Frankel

CHICAGO: Options on Google Inc., one of the year's hottest new stocks, ended their first day of dealings among Friday's most actively traded issues.

Shares in Google, the world's largest Internet search engine, made their Nasdaq stock debut on August 19 after a highly anticipated, if unconventional, initial public offering.

"The debut of Google options was hugely successful. The market makers were providing a lot of liquidity," said Scott Sheridan, co-founder of thinkorswim, an online options firm.

By Friday's close, roughly 31,128 calls and 37,990 puts changed hands combined across the U.S. options exchanges, according to market research firm, Track Data.

That exceeded Friday's brisk options volume on PeopleSoft Inc. where about 66,815 contracts traded on the technology stock, Track Data figures showed.

A large chunk of Google's options volume was traded on the Chicago Board Options Exchange, that said about 20,000 contracts changed hands, and the all-electronic International Securities Exchange, where 25,886 contracts traded.

Equity options -- which give the right to buy or sell a stock at a predetermined price within a set time period -- offer investors a way to speculate or manage the risk and exposure of their stock holdings.

One challenge for market makers was the pricing of the options, given that Google shares had such a limited trading history. In the past, newly listed options were offered after the stock had been traded for several months.

"Because we have only five days of trading history in Google shares, computing the historic volatility of the stock was extremely misleading," said Michael Schwartz, chief options strategist for Oppenheimer & Co.

Therefore, option traders had to price the options on implied volatility compared with similar companies such as Yahoo Inc., which was not easy, traders said.

Implied volatility is the level of volatility currently embedded in an equity options contract. "Given the limited trading history and uncertainty, the general consensus seemed to be that the options premiums would reflect high volatility," said Frederic Ruffy, an analyst at investment education firm Optionetics.

But Ruffy noted the implied volatility of Google options was not extremely high because the liquidity of the contract removed an element of risk for market makers, which helped ease the volatility priced into the contract.

Secondly, shares of Google have traded quietly since they were listed. After the initial one-day pop, the stock has experienced average daily moves of only $1.78 or 1.65 percent, Ruffy said.

GOOGLE STRADDLE

On Friday, a few players made a windfall on Google options using a trading strategy called a straddle, which involves the simultaneous purchase or sale of a call and put option based on the same underlying security with the same expiration date.

"The September 110 straddle started the day trading at $13. Later, it narrowed in to about $9.50. That means if you sold those options at the beginning of the day, you made a profit of 30 percent, entirely due to the collapse of implied volatility," said Jeff Shaw, head options trader at Timber Hill, the Pacific Exchange specialist for Google options.

Google shares fell $1.76, or 1.6 percent, to end at $106.15 on the Nasdaq.