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New Option for Google Employees' Options

December 13, 2006

"We must beware of needless innovation, especially when guided by logic!" -- Winston Churchill

Dear Fellow Options Trader,

Google showcases so many news headlines on a daily basis that it's hard to keep track of them all. Just for grins, I ran a Google search for "Google" and found some 32,000 stories related to the search-engine kingpin. I don't care if you're speed-reader Evelyn Wood herself -- you're not getting through that big of a pile before New Year's Eve!

My point is that separating the wheat from the chaff isn't always so easy, but one headline in particular -- "Google unveils unorthodox stock option auction" -- caught my eye.

The article detailed what this new program would entail, which is the allowance for employees to sell their vested options in online auctions. This aims to create liquidity for Google employees and an opportunity for outsiders who could only participate in this fabulous success story via public stock and options exchanges.

Clearly there is substantial interest in trading Google (GOOG) stock and options, as my systems show 27 million options and approximately 2.04 billion shares of this online giant have traded thus far this year!

So what is this "transferable option," and how can you get into the game? Read on!

Google's Transferable Stock Option program gives non-executive Google employees a secondary market that will be managed by Morgan Stanley. Once the employee's options have vested, that employee will be able to auction his or her grants on this site to the highest bidders.

Somewhere north of 6.6 million options that were granted after Google's August 2004 IPO will be eligible for trading, but Google needs to modify those options to make them transferable, which will trigger an expense for the search-engine giant. Microsoft (MSFT) and Cisco (CSCO) have already made changes in their options grants to make them tradable, but neither has gone as far as Google, nor have they teamed with a broker to run a site on which the options can be transferred.

This will certainly be a positive for Google employees, but this first-of-its-kind exchange will not likely produce much in the way of bargains, despite what a number of articles in the financial press have posited. Why? Because the markets are just too efficient.

Think about it: If the options offered on the Google transferable option site are too cheap, they will be bought and hedged in the listed markets faster than the Chicago Bears' Devin Hester can return a kick for a touchdown! (And he just set an NFL record for that this week!)

As this transferable stock option program will not start until the second quarter of 2007, none of us will know for sure how actively these transferable options will trade on this site. However, it does beg the question whether this exchange is just being set up for GOOG options, or whether they'll offer the trading of other companies' option grants if they make them transferable.

And I think we both know the answer to that question!

BUY LIST UPDATE

It's expiration week for three of our option trades. First, the bad news.

Despite a lot of promise, our Red Hat (RHAT) Dec 22.50 Calls (RCVLX) are finishing in the red on Friday. When we initiated the trade in October, the "smart money" was looking for the stock to make a quick move above $20, but today shares have barely grazed $16. I wish we had more time with this trade, but it comes off the board in two days and there is more fresh meat out there for us to run down!

Our other two December expirations, the Ciena (CIEN) Dec 25 Calls (EUQLE) and the remaining half-position in the BJ Wholesale (BJ) Dec 30 Calls (BJLF) are currently down but not out. The CIEN calls still have a little more than half their value, so I recommend closing the trade here -- I don't see any more upside for this trade, and unfortunately, not in the next day or two, either.

The BJ calls treated us well initially, as we were able to book a 38% gain in late November. We've been holding the balance for some more upside, but the trade has managed to just hang in there with a slight loss. Let's cut our losses here and remember that we practiced prudence by taking a profit when we could and that the loss we're taking is only on a half-position.

Good luck trading and remember, pigs get fat but hogs get slaughtered!


Jon "Doctor J" Najarian
Editor
ChangeWave Options Trader