BUY: Google LEAP Put Jan. '07

Right now, Google is on fire, mostly for good reasons (though a bad reason - thin float also explains things). The result is the 24th largest company in US markets by market cap, larger than big, important companies like Novartis and Wells Fargo. Valued at $125b ($420/share), Google will pass IBM's valuation if the stock rises just 7% more.

I'm a fan of Google, but I can't justify such a lofty valuation.

Google gets 99% of it's revenue from advertising. I don't believe that Google can continue the growth rate that justifies such a lofty valuation, nor do I believe that it's competitors will allow it - already MSFT and Time Warner are considering how to jointly maximize AOL's ad platform, while Yahoo isn't standing still either.

In financial terms, GOOG has $5B in revenue and $2B in EBITDA (or thereabouts), valuing the company at 25x revenue, or 62x EBITDA. (Current P/E of 93 and forward P/E of 49; PEG of 2.36). In short, it's an overheated stock.

But it's always dangerous to bet against a charging bull like GOOG. A mistimed short could cost a fortune.

So, betting that GOOG has to come back to Earth sooner or later, I just bought a LEAP put option at $320, dated January 2007. I paid $17/contract, so if Google drops to $303 before Feb 1, 2007, I'm in the money. If not, I'm out $1,700 (1 contract).

So, I'm gambling $1,700 that Google drops 28% over the next 14 months. If GOOG were to drop 33% to $281, I'd make a profit of $2,200. Should it drop by 50% -which I could easily see happening - I make $9,700 in profit.

(Or, I could always sell the LEAP before expiration. In this scenario, I could still make a profit before GOOG hits $303.)

It's a silly bet against the current wisdom, and I could be hilariously wrong (I've suggested shorting when GOOG was at something like $200), but I'm comfortable taking the risk. It's not for everyone. Is it for you?