Mega-caps like Alphabet Inc (NASDAQ:GOOGL) have been on fire of late. The mega breakout started in April, leaving the shorts in a world of hurt. Most investors who are not in on GOOGL stock, however, have been left looking for entry points.
Click to Enlarge Of course, that’s the challenge, isn’t it?
While the rally is good news to those who are already long hot stocks like Alphabet, Apple Inc. (NASDAQ:AAPL) or Netflix, Inc. (NASDAQ:NFLX), this poses a problem to potential investors. As fast as GOOGL has been rallying, it perpetually looks like it’s due for a pullback. Alas, dips have been scarce, and even when they do come, they barely register on anyone’s radar.
This doesn’t mean that we have to stay on the sidelines. Three weeks ago, I shared a trade on GOOGL stock that delivered free profits out of thin air and with absolutely zero worry. Another successful trade (to prove it wasn’t a fluke) delivered a whopping $12 per contract in pure profits with zero out-of-pocket expense.
Look, I can’t promise another $12 home run, but I can reset a new trade with profits in hand that would have similar prospects for success.
How to Trade GOOGL Stock Now
The Bet: Sell the Sep $805 naked put and collect $6 per contract. With a 15% price buffer, I have a 90% theoretical certainty that price will expire above my strike so I can retain the premium for maximum gains. Otherwise, I suffer losses below $799 per share.
Usually I like to sell opposing risk for balance.
The Hedge (Optional): Sell the Sep $1,100 call and collect an additional $6 per contract. This bearish bet also has a 90% theoretical chance of success, but if GOOGL stock rallies more than 15%, it could be painful. I would delay entry into this or overweight the bullish side 2-to-1 so I’d still be leaning bullish.
Selling naked options is very risky business and is not suited for a lot of investors. But I could use spreads and still accomplish the same setup and yield more than 15% on risk.
Spreads are by definition self-hedged alternatives to naked puts. If price goes against the trade, the damaged is relatively contained. Compare that to needing to spend $955 per share and hoping Alphabet rallies 15% through September.
My setup will pay me, even if GOOGL stock does nothing through the fall season.
E-mail email@example.com with questions or join me to learn more about options in a personal 1on1 webinar 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.