The last few trades I shared on Alphabet Inc (NASDAQ:GOOGL) were successful. This includes a win in November after I explained how to collect free dividends on GOOGL stock as we collected over 15% in yield on money risked.
Click to Enlarge Alphabet’s fundamentals have not changed. I still like it for the long-term. Management continues to execute very well on the cash cow businesses. Better still: Spending on the fringe projects seems to be under control for now.
Technically, GOOGL stock was tested in late 2016 but has since recovered. Traders sold Alphabet stock and others mega-tech companies like Facebook Inc (NASDAQ:FB) and Amazon.com, Inc. (NASDAQ:AMZN) to roll into the Trump trade. Since then, the selling abated and the trade unwound.
Now, mega-tech companies are going into earnings with the winds in their sails. That includes Alphabet, which reports on Thursday, Jan. 26, after the bell.
How to Trade GOOGL Stock Now
The Trade: Buy the GOOGL Feb $835/$837.50 debit call spread for $1.20 per contract to open. This is my maximum potential risk. I stand to double my money if GOOGL stock rallies past my spread in the next few weeks.
Premiums are usually elevated ahead of earnings, and sometimes we see a move ahead of the report. If so, then I could close the spread and book partial profits early.
Usually I like to balance my trades by doing the opposite. But this time, since we are going into earnings, I will not sell any bearish risk into GOOGL earnings. Another hedge idea would be to short the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ). But today, I will do neither. Instead, I will simply go long Alphabet Inc options as a lottery ticket betting on a positive reaction to their earnings.
I could further juice this trade by adding a credit put spread to collect premium and offset my out of pocket expense. However, this adds more downside risk. Personally, I prefer to wait until after the earnings report before I sell premium into GOOGL.
Still, if you’d like …
The Juice (Optional): Sell the GOOGL Mar $750/$745 credit put spread for 65 cents per contract. This trade would yield 13% if GOOGL stays above my sold spread while I am holding. This trade has a 90% theoretical chance of success with a 10% price buffer.
Earnings events add a short-term wild card to credit spreads; the short-term adverse reactions are often short-lived.
I am not required to hold any option trade open 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.
