Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) reported earnings last night and they delivered a gem. Investors loved what they saw and GOOGL stock rallied to $1,040-per-share. The buying is still ongoing now.
The rally is not as big as that of Amazon.com, Inc (NASDAQ:AMZN), but for a company this mature and this big, the rally is impressive.
We’ve had massive moves in GOOGL stock on earnings before, but they tend to temporarily fade thereafter. So buying shares here could be costly. That’s why I prefer using options to participate on the bullish side for the near-term.
Fundamentally, Alphabet stock sells at a price-to-earnings ratio near 30X. This is not cheap relative to Apple Inc. (NASDAQ:AAPL) or Facebook Inc (NASDAQ:FB). AAPL is flat out cheaper and FB has better growth.
GOOGL Stock Still Stands Out
But what GOOGL has is potential. The company owns several platforms with over a billion users each. It also has a good foothold into other forays, mainly the self-driving car arena. Currently, search is the only bread and butter.
YouTube alone could become a monster earner. I know I will be a paying customer in about six months when my cable contract expires. I will try their monthly streaming service, which will eventually rival that of Netflix, Inc. (NASDAQ:NFLX).
We are all hooked on smart phones. I can’t even remember the last time I left my house without it. My phone of choice has always been android-based. In fact, android dominates the global market in share. I mention this to make the link into the home.
I recently got rid of my Alexa from AMZN for a GOOGL home assistant. My success rate using my GOOGL voice assist on my phone had been near perfect for a long time. Alexa was a dummy compared to it. I bet I will not be the only one. Before we know it, GOOGL will have eyes and ears inside our homes. It already has Nest.
Expectations matter when it comes to price action. Wall Street experts currently have all the upside baked into their recommendations. Even after this spike, GOOGL stock still trades near the average price target.
Furthermore, it is still more than 20% below the high end of the range. Not one expert expects the price to be under $1,000 per share. What I am saying here is that this spike may catch a few late comers as those who are already long may book profits.
This is a short-term note and not the same as to say this is the top.
The Trade: Sell the GOOGL Apr 2018 $860 put for $14. This is a bullish trade that does not require a rally to profit. Here I have an 85% theoretical chance of success. But I would accrue losses below $846.
Selling naked puts carries big risk. For those who want to mitigate it, they can sell a spread instead.
The Alternate Trade: Sell the GOOGL Apr 2018 $865/$855 bull put spread, which has about the same odds of winning and would yield 15% on risk. Compare this with risking $1,020-per-share without any room for error, expecting a rally profit. In fact, GOOGL has 15% room to fall from here and I could still profit.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose
Get my newsletter for free 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 as @racernic on twitter and stocktwits.
