Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) is a cash cow. Management rarely errs. In the past, they were criticized for chasing wild ventures, but the recent division of its reporting put an end to the criticism.
Even though it’s a proven winner, Google stock has been punished on earnings before, so going long into earnings with sizable risk is a gamble.
In fact, the short-term reaction to earnings reports is generally a gamble for any stock. Even if we see the profit and loss statement ahead of time, we wouldn’t be able to guess how traders will react to the results regardless of their quality.
Click to Enlarge The 18%-plus reaction to Netflix, Inc. (NASDAQ:NFLX) earnings leaves traders eager to repeat performance on other mega-caps’ reports. Alphabet Inc is a quality company and is a candidate for a similar reaction.
Since GOOGL has rosy long-term prospects, it opens the door for an earnings pair trade for little or no money out of pocket.
GOOGL Stock Trade Ideas
Trade No. 1 — The Long Bet: Buy GOOGL Nov $855/$860 debit call spread. This is a bullish trade for which I pay $1.30 per contract to open. This is the maximum I can lose.
I need GOOGL to rally through both legs by mid-November to capture my maximum gains of $3.70 per contract. After the earnings there will be a premium crush, so I will need the move to come close to my debit spread so my premiums don’t fizzle out.
To lower my risk, I can lower the out-of-pocket expenses by selling bullish risk to finance the purchase of the upside potential I am trying to capture. I only do this with quality stocks that have a rosy mid-term outlook.
Trade No. 2 — The Bank: Sell GOOGL Nov $740/$725 credit put spread. This is also a bullish trade for which I collect $1.50 per contract. This leaves me with a small net credit to open the trade. However, this exposes me to potential risk if GOOGL were to fall under my sold put spread.
The risk is set 10% below current levels. There are ways of mitigating this risk should Google stock crash on earnings. I could go lower and further out in time for a bigger buffer than 10%.
Since my entry cost is nil, as long as GOOGL holds above my sold spread, any premium I collect for selling the debit call spread would be profit. If GOOGL goes nowhere then I am left with the small net credit I collected to place the pair trade.
I am not obliged to hold these trades through their expiration. If Google stock spikes before earnings, I could peel the whole thing off for profit and not even sweat the event.
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.
