Alphabet Inc (GOOG, GOOGL): Trade Google Stock for Free

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While waiting for the U.S. Federal Reserve to raise rates, markets have been trading on headlines, and it’s doing so in a range. Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) has had some brilliant days, but its stock price is still down 5% year-to-date.

While I think Alphabet management is a proven overachiever, and I see a rosy future for Google stock in the future, I think the markets will face resistance for the rest of this year — and thus, GOOGL will also face resistance.

Google stock chart GOOG GOOGL
Click to Enlarge 
Fundamentally, GOOGL should not be shorted for the long-term. Technically, however, shares are wound tight, and a sizable move is imminent. Naturally, we don’t know what way that will be. As of right now, the upside looks more likely than the downside, but I think Google stock could quickly run into resistance around $745 per share.

At the risk of being wrong, I want to bet with the bears this time. But I’ll suggest using a pair trade setup with limited out-of-pocket costs. That’s little risk for you and me, and it makes the trade easier to manage.

The fact that the markets look bearish in general works against Google, which has been lumped into the now-famous FANG group of stocks that also includes Facebook Inc (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN) and Netflix, Inc. (NASDAQ:NFLX).

The FANG stocks are momentum stocks. They move bigger and much faster than other mega-caps. So on bad days, Google could lose 3% to 4%.

Really, this trade on GOOGL stock is a cautious trade against the broader markets. This isn’t speaking against the value of Google shares at these levels, it’s just a short-term trade — and one that comes at zero cost, I might add.

Trade No. 1: Buy the GOOGL Aug $725/$720 bear put spread for $2. I essentially double my money if Google stock falls past both legs by mid-August. I prefer buying the spread close to the money so I only need to guess direction and not also size of move. As of Tuesday’s close, a 1% drop in GOOGL would put this trade in the money.

To eliminate my entry cost, I will sell a strangle in GOOGL stock. This will open risk, but with large enough buffers to make it easy to manage.

Trade No. 2: Sell the GOOGL Jan $630 put for $20.30. This completely offsets the entry cost of trade #1 rending my out-of-pocket risk to zero. Ideally I want GOOGL to fall up to 10% by August then rebound into January. I only sell puts if and only if I am willing to own GOOGL stock at $630 per share which is a 14% discount from current level.

Trade No. 3 (The Hedge): To balance the sold put, I can sell GOOGL Jan $920 call for an additional $5.50 per contract. This is an optional addition that I won’t pull the trigger on until I see the next few candles.

Selling calls opens unlimited risk. If GOOGL stock rallies more than 25% from current levels this year, I could suffer losses. I only sell naked calls if I am able to cover those losses. The reward of adding the sold calls is that I would be left with a net credit. If GOOGL stays between -14% and +25% from current levels, I profit at $5 per contract. I’m pretty comfortable with that.

I can limit these risks by replacing the sold strangle (trades No. 2 and 3) with a sold iron condor. I am not obliged to carry these trades through expiration; I can close any of them at any time for partial gains or losses.

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. You can follow him on Twitter at @racernic and stocktwits at @racernic.

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Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2016/05/trade-google-stock-for-free-goog-googl/.

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