Trading in the newly listed options on Google Inc this year's hottest new stock, got off to a strong start on Friday with heavy volume.
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 priced below estimates.
By midafternoon Friday, Google options volume traded robustly with roughly 27,133 calls and 21,200 puts changing hands combined across the US options exchanges.
A large chunk of that volume was traded on the Chicago Board Options Exchange and the all-electronic International Securities Exchange, two of the largest US equity options exchanges.
But one challenge that market makers had to overcome was the pricing of the options, given that Google shares had such a limited trading history. In the past, newly listed options are offered after the stock has 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.
An equity option gives the right to buy or sell the stock at a predetermined price within a set period of time. And evaluating the price of a newly listed option is dependent on the volatility level that has been estimated by the market makers who provide the liquidity.
In the options market, implied volatility measures as a percentage how much the options market thinks the stock price will move during the option's life.
The stock's historical volatility gauges how much the stock price actually has moved during a certain time period.
"Typically, market makers will use similar stocks like Yahoo! Inc to use as a benchmark for setting volatility in a new issue," said Herb Kurlan, president of MDNH Partners, an options market making firm based in San Francisco Kurlan said.
Kurlan noted the implied volatility in Google October options is around the 50 level, which is comparable to Yahoo's volatility in the current market.
Put buying, which gives the holder the right to sell the stock in the future, was noticeably high in Google puts that are close to the current Google share price of $106. Schwartz said he believes those puts may have been bought by insiders with restricted shares.