After a stunning 27% rally off of the Sept. 29 low, Alphabet Inc.(GOOG, GOOGL) is starting to look toppy. The price action Wednesday points to a short-term top in Google stock, with shares of GOOGL making a new all-time high of $793.05, before reversing to close lower on the day at $777.85. The pattern on Thursday was similar, with Google stock price trading higher initially only to fail and close in the red.
Click to Enlarge This type of price action in GOOGL signals a technical trend reversal, with buyers finally being daunted and the sellers able to take control and push the stock lower.
In candlestick jargon, the trend reversal pattern is called a shooting star, and could mark a resistance level in the Google stock price.
GOOGL is now the second biggest U.S. company by market cap, trailing only Apple (AAPL), so the ability to maintain the current growth rate will be difficult simply because of the law of large numbers.
With Google stock sporting a trailing twelve month price-earnings ratio of 32.38, it is certainly not a cheap stock, trading at a hefty premium to the S&P 500 multiple of 19.
Implied volatility has cratered over the past two weeks in Google stock, trading near the lowest levels of the year. This low level of complacency in option prices many times is indicative of a intermediate-term top in GOOGL.
Click to Enlarge Shorting GOOGL is a risky proposition, and certainly expensive from a margin standpoint. Instead, I would employ some defined risk option strategies to position for a pullback in GOOGL at a much lower level of capital commitment and risk.
GOOGL Stock Trade Ideas
With IV, and therefore option prices, at comparatively cheap levels, I favor long option strategies. My trade structure is a put diagonal spread, buying the GOOGL Jan $740 puts and selling the GOOGL Dec $720 puts for a $10 net debit. The risk on the trade is the $10 net debit, with the initial position being net short 14 deltas.
Ideally, GOOGL stock closes near $720 at December expiration to realize the maximum gain. If GOOGL stock closes above this level at expiration, additional shorter-term puts can be sold against the long Jan $740 puts to further hedge and reduce the initial cost, while still maintaining a bearish stance.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.
