Alphabet Inc (NASDAQ:GOOGL) is a tech mega-cap that has been on fire for years. Management is a proven performer, and so is GOOGL stock, but along the way they’ve had to silence many critics. Alphabet was torched for pursuing unusual businesses … but when you have a cash cow as big as search, you are supposed to test what’s beyond the norm.
It’s easy to argue the fundamentals; Alphabet is on rails, and shares are not expensive. The company has several platforms with several billion users each, and most of them haven’t even yet contributed their share. This is untapped potential that could leapfrog the company through the next few years.
My thesis for GOOGL stock remains the same. Long-term, Alphabet is a proven winner, so I try to generate income from dips. While the markets are uber-bullish, bulls have been hesitant to sustain the breakouts.
They do buy the dips, though, and that is all I need to create my income.
I could spend $980 per share to buy GOOGL stock, but that is too rich for my taste — especially considering I would have no buffer. Who wants to buy near all-time highs and simply hope for higher prices?
Instead, we can use options to create profits out of thin air. The place to do this is worthy tickers such as GOOGL, which we know have proven value levels where buyers will step in to defend my position.
How to Trade GOOGL Stock
The bet: Sell the Jul $900 put naked and collect $4.50 per contract. This is a bullish trade that has a 90% theoretical chance of giving us maximum gains. But if shares fall below $900, we’ll own them, and we’ll accrue losses below $895.50.
Alphabet is a high-ticket item, which makes selling naked puts require a lot of margin. We can temper the exposure by using a spread instead.
The alternate bet: Sell the Jul $915/$910 credit put spread. We have the same odds of success, but with finite risk. Still, the spread will yield 25% if successful, which is better than paying $980 for GOOGL stock now, having no room for error and needing shares to rally 25% just to equal the performance of the spread.
Usually I like to balance my risk by selling an opposing setup. In this case, I will delay this action, but it would look like the following:
The hedge (optional): Sell the Jul $1040/$1045 credit call spread. This is a bearish trade which has an 85% chance to yield 12% on risk. We need GOOGL to stay below our strike to earn maximum gains.
Selling options is risky business, so only put up what you can afford to lose.
Learn how to generate income from options 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.
