On Tuesday morning, we woke up to a headline that the EU slapped a 2.4 billion Euro fine onto Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL). They accused the company of favoring its own ads. As a result, GOOGL stock fell almost 3% on the headline, even though in reality it’s likely to take years of litigation before the fine is final.
Regardless, even if management had to pay the fine, it won’t be anything significant that would change the financial fundamentals of Alphabet stock.
A company as mature as GOOGL should not move of this magnitude except perhaps on earnings events. Yet thanks to FANG, GOOGL is now associated with the likes of Amazon.com, Inc. (NASDAQ:AMZN) or Netflix, Inc. (NASDAQ:NFLX), so it tends to trade as fast as them, even though it shouldn’t. Compare GOOGL’s 32 price-to-earnings ratio to that of AMZN at 184 or NFLX, which is even higher.
Alphabet’s price-to-book is under five, so owning the shares at these levels cannot be a massive risk in the long run.
Click to Enlarge GOOGL fundamentals are as solid as they get. Management addressed and overcame the bones that Wall Street had to pick with them. Now they have serious forays into the driverless car market and more. In addition, management holds several platforms with over a billion users each and most remain to be monetized.
In short, there isn’t much to dislike about the long-term Alphabet stock prospects, so sizeable dips should be buying opportunities. The only problem is that we are not getting dips that last, so I am forced to jump in on a 3% pullback when I see one.
I usually restrict most of my GOOGL trades to be on strong conviction and mid-term in nature. Sometimes I do scalp a short-term opportunity such as this June trade that delivered $2 in income out of thin air.
Today’s trade is based on the assumption that this temporary EU headline malaise should pass sooner rather than later and with an appropriate buffer it’s a dip I can buy for the mid-term. No, I won’t risk $950 to buy the stock without any room for error. Instead I will use Alphabet options, where I can create a bullish trade with ample room for further downside.
GOOGL Stock Trade Idea
The Bet: Sell GOOGL Sep $865 put and collect $12 per contract to open. Here I have a 85% theoretical chance that I will retain my maximum gains. But if GOOGL falls below my put, then I have to own the shares and could suffer losses below $853.
I know that selling naked puts, especially on such a high-price stock, is daunting. So I can start with a credit put spread instead. Then I have the option to turn it into a naked put by selling out the protection leg for even more premium.
The Alternate Start: Sell GOOGL Sep $875/$870 credit put spread, where I have about the same chances of success only with smaller risk. If price stays above my spread, it yields 25%.
In either case, I don’t need a rebound in GOOGL stock to profit. All I need is for the price to stabilize above my risk through expiration. I have to note that Alphabet reports earnings soon, and I may need to buy cheap temporary insurance through the event.
Selling options is risky business, so I only risk what I can afford to lose.
Learn how to generate income from options 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.