There are a few companies who are obvious winners in the long run and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) is one of them. I usually go long GOOGl stock on dips, but in this animal-spirited equity market we are not getting any significant pullbacks. This makes finding entry points difficult for most investors.
But I don’t have to stay out. Using the options market, I can find long GOOGL trades at almost any time. Just recently when GOOGL was near its all-time high, I shared a long trade that paid well and quickly. Today, I will set another trade to profit long GOOGL with relative confidence.
Instead of buying GOOGL stock and risking $840 per share at these elevated levels, I will instead sell risk below proven support. Rather than chasing Alphabet’s target price, I risk money at levels where price is not likely to go. In essence, I’d be selling someone else a lotto ticket that is a loser by design.
The Trade: Sell the GOOGL 2018 June $700 naked put and collect $23 per contract. This trade has an 85% theoretical chance of success by having my sold puts expire worthless for maximum gains.
By selling naked puts, I commit to buying GOOGL stock at $700 if it falls below it. Anything below $677 per share would accrue losses for me. So in essence, I am getting paid for the opportunity to buy $GOOGL stock at a 16% discount from current levels.
This trade is not suited for everyone so for a tamer version of this I can turn it into a $700/$690 credit put spread with the same metrics only with a limited risk profile. The spread would have the same chance of success and still deliver over 20% in yield on money risked.
Usually, I like selling opposing risk to hedge my bet. But in this case, I won’t do it yet because I feel confident I would be able to manage the risk against short-term price gyrations.
But I could rent some insurance around earnings by buying cheap short-dated puts to cover the disaster scenarios.
Learn options as easy as 1-2-3 here. 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.
