Fourth-quarter earnings season is fast approaching, and Alcoa Inc. (AA) marks the unofficial start next week.
Regular readers know that it is a bit early for me to speculate with options trades weeks in advance of a company’s quarterly report, but there is method to my madness.
Alphabet Inc. (GOOG, GOOGL) steps into the limelight in about the last week of January or the first week of February; and with the stock currently oversold, now may be an excellent time for the bulls to prep a GOOGL earnings trade.
After hitting all-time high territory in the final days of 2015, Google’s stock price has pulled back sharply to long-term support at its 50-day moving average. The shares are also holding above technical support at $750, an area that GOOGL closed only a handful of sessions below since crossing above it in November.
Sentiment toward GOOGL stock is running extremely bullish — attracting a whopping 48 “buy” ratings and three “holds,” with nary a “sell” to be found. That said, there’s room for price-target increases. The current 12-month consensus of $850 represents a minor premium of about 12% to the stock’s current post-correction levels.
Wall Street also appears to have high expectations for GOOGL earnings as well. Currently, fourth-quarter consensus projections put Google’s earnings up 19.8% year-over-year at $8.10 per share. Revenue, meanwhile, is expected to rise 14.8% to $20.78 billion. Although Google has missed the consensus estimate in each of the past seven quarters, its shares continued higher.
Click to Enlarge Turning toward GOOGL options activity, traders are a bit apprehensive given the current market environment, but the bulls are beginning to emerge in the Feb. 5 series — i.e. the one likely most affected by Google’s coming earnings report.
Specifically, GOOGL’s current January/February put-call open interest ratio comes in at a middle-of-the-road 1.02, with calls and puts in near parity. However, this ratio plunges to 0.75 for the weekly Feb. 5 series.
In other words, while speculative options traders are largely uncertain regarding GOOGL’s short-term direction, they are leaning bullish when it comes to the stock’s reaction to earnings.
Overall, weekly Feb. 5 series implieds are pricing in a potential post-earnings move of about 8.7%. This places the upper bound at $825.90, while the lower bound lies at $694.10. Keep in mind that we have roughly a month of trading still to go before Google reports, so volatility and these expected levels will change.
2 Trades for GOOGL Stock
Call Spread: Those bulls looking to take advantage of a potential rebound from current levels and/or a positive reaction to Google’s quarterly report might want to consider a Feb $770/$800 bull call spread. At last check, this spread was offered at $9.10, or $910 per pair of contracts. Breakeven lies at $779.10, while a maximum profit of $20.90, or $2,090 per pair of contracts, is possible if GOOGL closes at or above $800 when February options expire.
Put Sell: On the other hand, if broad-market headwinds have made betting bullish a bit unnerving for you, then a deep out-of-the-money put sell may better suit your risk tolerance. At last check, the February $650 put was bid at $6.60, or $660 per contract. The upside to this put sell strategy is that you keep the premium as long as GOOGL stock closes above $650 when these options expire. The downside is that should GOOGL trade below $650 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $650 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
