Alphabet Inc (NASDAQ:GOOGL) has had a miniature correction of about 8% over the past few weeks. It came on the back of a collection of small issues, none of which are deal-breakers for me. GOOGL stock still has a rosy future, and unless markets in general are ready to severely correct, this too shall pass.
Fundamentally, Alphabet shares are not expensive. But one could argue that it’s not cheap either. For example, GOOGL is priced in line with Facebook Inc (NASDAQ:FB) and Microsoft Corporation (NASDQ:MSFT), but it’s twice as expensive as Apple Inc. (NASDAQ:AAPL).
Of course, all these stocks are solid performers, and unless the macroeconomic situation collapses, they will all be higher by this point next year.
Today, I want to set a trade on GOOGL stock that will create income out of thin air. All I need to do is find a support level that will hold up through 2017. There are some outside issues to fret, like the uncertainty from European Union regulators. But I think these are long-term worries and they will be resolved in court without much lasting damage to machine itself.
Otherwise, Alphabet is powering ahead on all cylinders. It owns several platforms with more than a billion users each — and management hasn’t completely monetized all of these yet. The services GOOGL provides makes users’ lives easier, and I’m a fan of what they offer — I speak from experience. I particularly love the voice commands that are built into my Android phone. I know Amazon.com, Inc.’s (NASDAQ:AMZN) Alexa hogs the headlines, but compared to my “OK Google” commands, my Echo is a dummy.
Click to Enlarge Technically, the bulls need GOOGL stock to tackle some important levels. These levels have been in contention for a while. If the bears prevail, we could retest the $895 area. This is not a forecast — just a threat that bulls need to consider for the short-term.
Corrections in this uber-bullish market are rare. So I will take advantage of this small dip to bet long Alphabet.
How to Trade GOOGL Stock
The trade: Sell the Oct $840 put and collect $6 to open the trade. Here I have 90% theoretical odds of success. But if Alphabet shares fall below my strike price, then I will accumulate losses below $834.
Selling naked puts requires margin and the ability to buy GOOGL shares. I can mitigate this risk by selling spreads instead. There the risk is limited to the width of the spread less what I collect to open.
The alternate trade: Sell the Oct $840/$835 credit put spread, where I have about the same odds of winning. Then the spread would deliver 10% yield. In either case, GOOGL stock can fall 10% and I can still win. Compare this with needing to risk $931 to buy the shares then hoping for a rally. I prefer having the buffer and not having any out-of-pocket risk.
Investing in the equity markets is always risky, so don’t bet more than you 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.
