Google (GOOG, $277.68, up $20.24) is trading higher this morning after saying it is “significantly” reducing the number of contract workers it uses, but has no plans at this time to lay off its own employees. Wall Street is applauding the news but I think it represents a great time to short the stock.

The company did not say how many contract workers might get the ax but the fat lady is singing and it could be one hell of an opera. Look, we all knew the economic slowdown would hit Google in some way, shape or form but if the company starts laying off its own employees it will make many Google bulls turn into bears.

There is no word on how fast Google would terminate some contractors but considering the firm has nearly 10,000 contractors I would expect the cuts to come swiftly.

The stock has been in a downtrend and failed to rally with the market yesterday as the Dow gained over 400 points. The break below $300 was a huge breakdown for Google and now that area will likely serve as resistance. We took advantage of this and recently closed a Google trade but today’s action is providing us with another opportunity to make some money. There have been numerous “Sell” recommendations by analysts on Wall Street who have joined the party since I mentioned Google looked poised to fall below $300 and there could be more on the way.

The chart is telling me Google could test $200 but how soon that comes is not yet clear. There are still some catalysts that make this stock a bargain to some but if today’s rally fails and the stock heads back lower than we could get a test of $250 again which might lead to another breakdown.

The December 200 puts (GOUXT, $3.50, down $2.20) are active today and yes, they are way out-of-the-money. It would hardly be shocking if Google falls to $200 and that is where I really think the bulls would come in and by in bulk but we are only playing these options for a quick trade. They will likely be closed by Friday.

For insurance, you could also buy one December 340 call (GGDLE, $3.10, up $1.20) for every two December 200 puts you buy. This will cut into some of your profits but will provide protection in case the stock continues higher.

Rick Rouse
Rick@OptionsMentoring.com

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