Alphabet Inc (GOOG, GOOGL) steps into the earnings confessional on Monday to release its fourth-quarter earnings report. You may remember that we took an early look at Alphabet stock as an earnings play back on Jan. 5.
At the time, I had expected the company to overcome the broader market weakness due to Alphabet’s long-term strength. But with GOOGL down more than 6% since, those expectations failed to bear fruit.
That said, there is still a solid earnings-related options strategy that should payoff. Before we get to that, though, let’s take a fresh look at the data driving GOOGL stock.
Fourth-quarter earnings are still expected to rise 19.8% year-over-year at $8.10 per share, with revenue gaining 14.8% to $20.78 billion. Remember, too, that Google has missed the consensus estimate in every quarter for nearly the past two years.
This fact hasn’t stopped bullish speculation from the analyst community, however. For instance, Alphabet has a fourth-quarter whisper number of $8.19 per share, nine cents better than the consensus.
What’s more, 49 of the 52 analysts following Alphabet stock rate it a buy or better, compared to three holds an no sell ratings. There is room for potential improvement, however, as the 12-month price target of $853 represents a modest premium of only about 19% to GOOGL’s Wednesday close.
On the options front, GOOGL’s February put-call open interest ratio has plunged sharply from when we last checked in early January, dropping from 0.9 to 0.76. The weekly Feb. 5 series ratio, however, has fallen considerably further, plunging from 0.75 to its current perch of 0.41, with calls more than doubling puts among options most affected by next week’s quarterly report.
Click to Enlarge Overall, weekly Feb. 5 series implieds are pricing in a potential post-earnings move of about 6.6%. Currently, this places the upper bound at $767.68, while the lower bound lies at $672.32. A breach of $700 would be significant for GOOGL bears, while $780 is the real upside limit for any short-term move.
2 Options for GOOGL Stock
Put Sell: While I would like to play calls on GOOGL ahead of Monday’s report, I believe a more cautious stance is warranted in the current market environment. The Feb. $650 put that we looked at on Jan. 5 still looks solid as long as GOOGL plays nice, but a deeper out-of-the-money position might be more prudent for anyone just getting into a pre-earnings trade.
Specifically, the weekly Feb $600 put has a good chance of finishing out next Friday. At last check, this put was bid at $2.30, or $230 per contract. As usual, you keep the premium as long as GOOGL stock closes above $600 when these options expire. The downside is that should GOOGL trade below $600 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $600 per share.
Call Spread: If you are really jonesing for a straight bull play on GOOGL stock, then a Feb $750/$760 bull call spread has potential At last check, this spread was offered at $4, or $400 per pair of contracts.
Breakeven lies at $754, while a maximum profit of $6, or $600 per pair of contracts, is possible if GOOGL closes at or above $760 when February options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
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