Thanks to the financial media, we can no longer mention Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) without talking about the FANG gang that includes Facebook Inc (NASDAQ:FB), Amazon.com Inc. (NASDAQ:AMZN), and Netflix Inc (NASDAQ:NFLX). With the proliferation of the acronym, they now trade as an asset class, which is unfortunate at times. GOOGL is a well-established success story which trades with a cheap price-to-earnings ratio, whereas NFLX, for example, is a bet on future expansion — otherwise it’s over-valued.
However, there are upside on days when NFLX rallies fast and GOOGL stock catches bids in sympathy. But I fear the downside has the potential to be more painful. We’ve seen Alphabet sell off 4% on bad days, and that is unwarranted without game-changing headlines to Alphabet’s business model.
So, in today’s bullish equity market, every dip In Alphabet is a buying opportunity. No, I don’t like to risk almost $1,000 buying the stock at face value and hope I catch a rally. I prefer to have a cushion to allow for imperfect timing. Rarely do we catch bottoms or tops in stock moves. So I prefer using GOOGL options to implement my bets.
Click to Enlarge I typically sell downside risk on dips to get long the stock. The reason I prefer this is because I would then be long GOOGL with no money out of pocket. In fact I get paid to open the trade. The icing on the cake comes from the fact that I would also have a healthy margin for error.
GOOGL Stock Trade Idea
The Bet: Sell GOOGL Sep $900 naked put and collect $6 per contract to open. Here I have an 85% theoretical odd of the stock staying above my strike, so I can keep the whole premium for maximum gains. But if the price falls below it, I have to own the Alphabet shares and suffer losses below $894.
Selling naked puts in GOOGL is daunting and requires a lot of margin to secure it. So to mitigate the risk I can sell spreads instead.
The Less Aggressive Bet: Sell GOOGL Sep $900/$895 credit put spread where I have about the same chance of success but with much smaller risk. The compromise is not too punishing, since the spread still can deliver 11% in yield.
Unlike buying the shares at these altitudes, these trades make profit without a rally in GOOGL. In fact the stock could fall 7% and I can still win which makes managing the short-term price gyrations easier than having $972 per share at risk.
There are no guarantees when investing in the stock market, so I never bet more than I am willing to lose.
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.
