While past performance does not guarantee future results, since Google’s IPO in 2004 this pattern has proven itself every quarter. The first chart below displays the gaps (white circles) and expiration dates (red dotted line). While on some dates the two didn’t line up perfectly (the expiration cycle and earnings), the gap and pin still proved significant. The sheer fact that a massive stock like GOOG has had this pattern 100% of the time so far should give even skeptical invertors and traders pause. Many may not believe in these patterns, but it is important to respect them for many traders with lots of capital do watch these. Even if it is the ‘tail wagging the dog’ these patterns should manifest at least a little attention.

The excel sheet is perhaps the most interesting data point. Read all of it. However should one have a short attention span and quick trigger finger, the average gap up was 8% (**having gapped up every time) and the average distance from the nearest strike was $1.45, not much considering GOOG averaged $470 a share during each October. Considering the massive premium in Google options $1.45 is not much (0.3% of average price). So selling premium, post the gap, could be a way to play this pattern should one be inclined to do so…iron condors for example.

Volume and open interest are also important to look at. The third graphic displays said variables on expiration Friday post earnings. Here after the catalyst, hedgers and speculators square up their positions, for they do not know if they will be assigned, expire ITM, or OTM…hence pinning the stock as they make these adjustments. The strongest years were 2009, 2006, and 2005; where the difference from closing price and strike was the smallest.  Thousands of contracts changed hands on these dates; forcing this phenomenon…this is the third chart below.

GOOG has been on a tear lately, this recent rally looks eerily similar to the late 2007 period where the stock raged to a new all time high for nearly 35 days in a row, with a day or two breather along the way, but still similar. See chart four. Maybe suspicious traders will position short ahead of the catalyst, and as they cover post the assumed gap up, they will be the last marginal buyer…as the stock then pulls back. In related news Eric Schmidt sold $130 million in shares between September 24th and 26th and filed to sell $1.45 billion worth of shares in February.

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mark@keeneonthemarket.com

Data courtesy of Thinkorswim