The ABCs of Going Long Alphabet Inc. (GOOGL) Stock

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Alphabet Inc (GOOG, GOOGL) stock has recently reported earnings under its new structure for the first time. Investors reacted positively to that report initially, but the recent downturn in the general markets has weighed on Google stock, pricing out the entire earnings move — and then some.

Fundamentally, Alphabet has proven management. Investors now can see how committed they are to their core search cash cow. GOOGL owns the search arena, but it also boasts other viable ventures that could turn into good future earners.

There are no obvious serious fundamental pitfalls for GOOGL, so unless the broader markets crash, I see limited downside risk and some upside potential for Google stock.

Technically, GOOGL is now back at a recent pivot point (yellow dashed line on chart). It would be constructive for Google’s stock price to use that point as forward support so the price action can stay aligned with the fundamentals. Falling general markets would make that difficult.

Google stock chart
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The $745 area is an important short-term pivot point. I want to use this pivot point and the recent clarity from earnings to bet that GOOGL has limited downside risk.

Let’s use options to minimize risk while maximizing gains. I will implement this strategy in two parts, like I did before earnings (and that paid me well).

2 Trades on Google Stock (GOOGL)

Trade No. 1: I sell the GOOGL Jun $590 put for $8.40. This opens the downside risk if Google stock falls, as I may get assigned GOOGL at $590 per share. My breakeven point would then be $581.60 per share, which would occur if GOOGL fell more than 20% from current levels. I can close this risk at any point between now and the expiration date.

This first trade expresses the opinion that the downside risk in Google stock is limited. It will pay me even if GOOGL falls, as long as it doesn’t fall much deeper than 20%.

The next trade is optional and needs higher prices in GOOGL for it to pay. These trades can be mutually exclusive, or can be used together.

It needs higher prices in GOOGL for it to pay. The two trades can be mutually exclusive.

So doing Trade #1 alone would generate income from the risk of owning Google stock at $582 per share.

Trade No. 2: I buy the GOOGL Feb $760/$762.50 debit call spread for $1.10 per contract. I only need GOOGL to rally 2% before being in-the-money.

For this combination trade to be 100% successful, I need Google stock to rise past my long call spread by February expiration. I stand to double my premiums, but since I am financing this by selling puts, any profits are pure profits. Even if Trade No. 2 is a complete loser, I still stand to gain from the puts sold in trade #1.

Selling naked puts is risky. I only do it when I am willing to buy the stock at the strike price sold. In this case, I don’t mind owning Google stock 20% cheaper than where it’s trading now. If I buy 100 shares of GOOGL outright, I would risk $75,000 at current prices. Any drop in price would result in immediate loss of capital. These elevated volatility levels have resulted in high call premiums, so buying naked calls is also too risky for an earnings trade.

Trade Modification

I can modify Trade No. 1 so I don’t carry open-ended risk. In addition to selling the Jun naked put, I can buy a shorter-term put at the same level that provides me with temporary protection against a 20% correction in Google stock. I can buy the Feb $590 GOOGL put for pennies. If I get assigned GOOGL at $590 before Feb expiration, I then own the right to sell the stock back to close at $590, thereby losing nothing. This temporarily limits my exposure.

The success of my trade depends heavily on the assumption that the macro health of the economy is on track and that the Federal Reserve won’t add to the risk by raising interest rates too fast.

Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities.

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Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2016/02/long-alphabet-inc-googl-google-stock/.

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