A simple name change from Google to Alphabet Inc (GOOGL) doesn’t change the fact Alphabet stock is quite simply a buy on the GOOGL price chart.
And if you know your ABCs, you’re smart enough to appreciate a bull call strategy as a better way to position in Alphabet stock in front of an upcoming earnings report. Let me explain.
Google’s decision to be known as Alphabet is part of a corporate restructuring to better reflect a business conglomerate that’s moving beyond its highly-profitable search engine and advertising origins.
Alphabet stock’s PhD computer scientist base is also probably happy to separate itself from that business as it looks to improve more noble problems in healthcare, energy and transportation using standalone companies which can provide for better transparency to appease investors.
Alphabet Stock Monthly Chart
Alphabet stock’s monthly chart is pretty straightforward and technically setting up to give an edge to bullish investors.
Plain and simple, Alphabet stock has established a symmetrical triangle over the past three to four months on top of another base of about 1.5 years in duration. Symmetrical bases like the one found in Alphabet stock are generally non-directional patterns. But if it develops as part of an existing trend, the formation is said to favor trend traders.
In this instance, with the GOOGL price trend clearly “up” on the monthly chart, we can assume a pending breach of the triangle should result in a bullish breakout.
Also favoring higher prices for Alphabet stock out of the triangle, the base’s apex is sitting roughly 7% above the prior base’s breakout level near $615 in GOOGL.
As the theory goes, because the rally thus far is not technically extended from the former breakout, the triangle is defined as part of a base-on-base formation. This type of situation carries additional, pent-up price power to potentially lift Alphabet stock to even larger gains than otherwise.
Lastly, there’s a forthcoming catalyst to get GOOGL out of its base-on-base triangle as well: the upcoming Alphabet stock earnings report.
Alphabet Stock Earnings
A set date for Alphabet stock’s Q3 earnings hasn’t been issued, but NASDAQ estimates after the close on October 15 as a best guess based on its proprietary algorithm.
In front of the report, analysts are forecasting earnings of $7.22 per share of Alphabet stock compared to last year’s profit of $6.35. At the same time, revenues are expected to grow to $15 billion compared to 2014’s tally of $13.2 billion.
In the immediate earnings aftermath, Alphabet stock saw a gain of 16.3% on a close-to-close basis despite missing profit views. In 2015’s two other earnings releases, profits came in below estimates, but GOOGL stock still managed to post gains of 2.91% and 4.74%.
Alphabet Stock Bull Call Spread
Based on November implieds of around 33%, Alphabet stock option traders are pricing in a 68% chance shares of GOOGL will trade in a range of about $79 from Tuesday’s close near $672. Said another way, option traders expect Alphabet stock has a 68% or a single standard deviation chance of trading as high as $751 or as low as $593 through November expiration.
November should be far enough beyond the mid-October release estimate to contain Alphabet stock’s earnings release as a stock catalyst while still giving traders a bit of a time cushion.
There’s nothing overtly threatening on the price chart to dissuade bullish traders from purchasing a long call in Alphabet stock in lieu of a long GOOGL stock position.
Extra risk does lurk beneath the surface, though. To guard against the possibility of a poor earnings reaction and reduce time decay and volatility risk significantly, a bull call spread in Alphabet stock is one smart way to trade the event with a stronger risk versus return profile.
Looking at the Alphabet stock options board, the November $685 / $705 for $7.50 or cheaper is one vertical which fits in well with what we’ve discussed.
At a price of $7.50 per spread, the trader’s breakeven of $692.50 is just over 3% from current prices. This is well inside the upper range of Alphabet stock’s option pricing expectations through expiration.
A move up of 6.4% in GOOGL would put Alphabet stock above the vertical’s upper strike. Should Alphabet stock rise to the occasion once more, at expiration this would yield a profit of $12.50 or return of 167% while maintaining the equivalent risk of just 1.1% on 100 shares of Alphabet stock.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT
