Alphabet Inc (GOOGL, GOOG) is a fundamentally outstanding company with solid earnings and a rosy outlook. Competition has done nothing but motivate the company to do even better. But what it does after earnings is based on the whims of the market.
Click to Enlarge Google stock spiked last quarter after reporting earnings of $8.67 per share (well above the consensus for $8.11), but quickly reversed to $682 in only four candles.
This reinforces my belief that the short-term reaction to quality earnings is a complete coin flip — we don’t know what the company will report, and we don’t know how traders will react to it.
Since then, Alphabet has set higher lows, and now it needs to maintain its ascending technical supporting line.
So, the price-action risk to GOOGL is if it loses the $740 area. From there, it could quickly lose another $100. I am not calling for it, but I have to recognize the potential for it. Conversely, Alphabet’s earnings can take it to all-time highs. On a fundamental basis, GOOGL can support higher valuations than the one it’s currently slapped with.
Trade #1: Buy the GOOGL May $790/$792.50 call spread. This is a bullish trade for which, at last check, you pay $1 per contract. If GOOGL rallies past both legs by mid-May, you stand to double your money. To profit from this trade even easier, you can reduce or even eliminate the out-of-pocket expense by selling risk far below current price levels.
Trade #2: Sell the GOOGL Jan $600 put and collect $13 per contract. Do this only if you’re able and willing to buy GOOGL at $600 per share. This leaves you with a 23% price buffer from the current GOOGL stock price.
Since I believe the short-term reaction to earnings is arbitrary, lotto-sized trades are appropriate for earnings.
In addition to these trades, you can also buy a real flyer on GOOGL by spending a small amount on the GOOGL April 22 $840 calls. I have lucked out a few times buying way out-of-the-money calls. But you can only profit if GOOGL stock spikes at the open. The caveat here is that you have to be willing to completely lose the premium spent on this last lotto element without much chagrin.
One thing I almost never do is risk a fortune on at-the-money calls into earnings. Then I’d be putting my money in the hands of the market’s knee-jerk reactions. If you feel confident in Alphabet stock rising on earnings, then buy the stock outright. At-the-money call values disappear if the earnings move is lower.
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.
