Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) is on fire of late as it just set a new all-time high. When a stock is rallying this fast, it becomes uncomfortable to chase. Even though it looks like we missed the GOOGL stock trade, it’s still possible to participate in whatever is left of the upside potential.
Within the past two weeks I shared a trade on how to buy GOOGL stock for a discount, and the trade delivered $6 in free profits with zero down. Today, I want to basically rinse and repeat, but for a different time frame and a bigger buffer for the earnings event.
Alphabet’s prospects are beyond reproach as it dominates the search arena with several other assets that have over a billion users each that are yet to be monetized. Even the self driving car effort that once sounded like science fiction is now closer to reality than ever. The bottom line is that it will take several disasters to trip up this giant for long.
I am a fundamental investor and GOOGL fundamentals are as solid as I like them to be. I am also a conservative trader, however, so I am not about to risk $879 per share without any room for error. To make matters worse, Alphabet reports earnings this week, and for the short term, the reactions to earnings are more gambling than investing.
Click to Enlarge Technically, there is not much to decipher from an all-time high starting point. So for that I am forced to take my position long into the options market instead of the equity itself.
This way I can risk much less and still participate to the upside. To a degree, the percentage moves in the options are much bigger than that of the actual stock provided we guess the direction correctly.
The Bet: Sell the GOOGL Dec $600 put. This is a bullish trade for which I collect $4 to open. I have a 90% theoretical chance of success. If GOOGL stock falls below my sold put I will be put the stock and suffer losses below $596 per share so I only do this if I am willing to own it there.
Changing this trade into a credit put spread instead would make it suitable to more investors because the spread carries a finite risk profile much smaller than that of a short naked put.
The Alternate: Sell the GOOGL Dec $600/$580 credit put spread which also carries a 90% chance of success in which case it would yield 4% on risk. This sounds boring but it’s by design after all the risk has a 30% buffer from current price.
Learn options as easy as 1-2-3 in a personal 1on1 webinar 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.
