OUTFRONT: Google's Options Odyssey
- June 22, 2009
By Asher Hawkins
A Cal State professor thinks Google's stock is a pawn for options market manipulators.
Is Google's stock a pawn for options market manipulators? That's a common refrain on Internet message boards, and now an academic is lending some credence to the conspiracy theories.
Jerry W. Liu, a finance professor at California State University, East Bay, studied the market for options written to buy or sell Google ( GOOG - news - people ) stock near earnings release dates for the first 34 months of its publicly traded life. He came away convinced that institutions have been uncanny in predicting how good, or bad, Google earnings would be and writing put and call options that leave them sitting pretty when the stock lands very near the strike price.
Google's stock has a high incidence of "clustering." That's the phenomenon in which a stock's closing price matches the strike price of one of its options on the day the option expires--enabling the writer of the option to pocket the premiums and pay out virtually nothing. Over Liu's study period he found Google's clustered more than any other optionable stock. The trend was most prominent around earnings release dates, when institutional traders' Google stock options bets ended up in the money 96% of the time and churned out for them profits of at least $30 million.
According to Liu, the most eyebrow-raising example of apparent manipulation occurred when the options market makers' guesses about where Google's stock would trade were off by a few dollars early on the days their options expired--but then swung in line with their bets at the close.
Is there a harmless explanation? Options market experts note that hedging often causes stock prices to cluster around a stock option's strike price. But such hedging is normally characterized by a slew of last-minute trading--something that Liu says was absent from the cases he studied. Liu says he sent the Securities & Exchange Commission a copy of his study and has been told that its staff is reviewing it.
FEATURED GRAPHIC WITHIN ARTICLE:
A WEEK IN THE LIFE OF GOOGLE STOCK OPTIONS
- Finance professor Jerry Liu cites trading in the third week of April 2007 as indicative of peculiar moves in Google's stock price. Early in the week institutions write options that will pay off for them if Google's share price finishes the week near $480.
- On Thursday afternoon Google reveals a banner quarter, with revenues up 63%% from a year earlier.
- Google's stock opens with a bang on Friday and hits $492.50 -- but then mysteriously closes at $482.50, enabling the institutions to cash in.
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