GOOGL Stock: The Market Is Wrong, Short the Nasdaq!

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We’ve seen an impressive run on stocks since February, but it was based on false headlines of an imminent crude oil freeze. Of course, the freeze never happened. And yes, the price of crude oil was too low and it deserved to bounce. But a recovery in oil prices alone is not a healthy reason to assume further growth in the stock market as a whole.

The reasons for this reckless behavior are many, but global central banks are at the source. “TINA” — There Is No Alternative — is forcing money that used to buy bonds into riskier assets, including the stock market. Reckless behavior always ends in a disaster. When no one is expecting a scenario, we raise the likelihood of a blindside. Year-to-date, Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) stock is in lockstep with the PowerShares QQQ ETF (NASDAQ:QQQ).

GOOGL Stock Chart
Click to Enlarge 
At these levels, I expect a correction in the next few months. Meanwhile, I respect the current market price action as bullish. Traders are not willing to sell without concrete bad news. Even then, red sessions are short and result in immediate bounces.

But while the markets are reckless, many mega caps are still well-priced. Apple Inc. (NASDAQ:AAPL) is not expensive given its outstanding earnings power and balance sheet.

Over the past 12 months, however, GOOGL is up almost four times more than the QQQ. This flies in the face of deteriorating global fundamentals while central banks pump unprecedented amounts of money into the system.

Alphabet’s shares have enjoyed a nice range over the past 18 months, and I plan to sell calculated risk against its highs and lows.

GOOGL Stock Options

Trade #1 – The bank: Sell the GOOGL stock Jan $960 call. This is a bearish trade for which I collect $3.50 per contract. I would be short GOOGL stock if it rallies past my strike price by mid-January and accrue losses thereafter.

Trade #2 – The short: Buy the QQQ ETF $114 March put. This is a bearish trade for which I pay $5.10 per contract. Ideally, I need QQQ to fall past my strike in the next 219 days. My profits would build for as long as QQQ falls.

Trade #3 – The bank’s hedge: In order to hedge my GOOGL January short call position, I will turn it into a short strangle position by selling the GOOGL Jan $620 put. This is a bullish GOOGL stock position for which I collect $4.40 per contract. Ideally I need GOOGL to stay above my strike price through mid January. This is a price buffer of 23% from current levels.

Bottom Line on the GOOGL/QQQ Trade

Ideally, I want GOOGL to meander between both strikes through January. Those trades would expire worthless for maximum gains. Then I’d be left with my QQQ long put position through March. I am not obliged to hold any of these positions into their expiration dates. I can close any of them for partial gains or losses at any time.

Selling naked options is dangerous and I only do it if I am willing and able to accept the associated risks. I could replace the sold GOOGL strangle with a sold iron condor. This would limit the risks associated with selling the GOOGL levels. The iron condor’s advantage is that it would offer a finite loss amount that would be friendlier from a margin requirement perspective.

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/2016/08/alphabet-inc-goog-googl-sell-short-powershares-etf-qqq/.

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