Mega-tech stocks are headed to zero … or so the current consensus on Wall Street would have you believe. Suddenly and going into the holidays, traders are selling quality stocks like Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), Apple Inc. (NASDAQ:AAPL) and Facebook Inc (NASDAQ:FB) to rotate into laggards like the retail sector.
The SPDR S&P Retail (ETF) (NYSEARCA:XRT) is up 15% in mere days on speculation that the bearish retail trade is over.
While that might be true, today I am betting that the death of the mega-tech trade is premature. So I want to add to my exposure to GOOGL stock but without any hopium.
Instead of risking $1,013 per share to buy the shares outright, I will bet that the short-term bottom is near. So I will use options to create income without any out of pocket expense. While traditional investors would need to be surgical with entry points into Alphabet stock, I merely need to choose solid support so I’d have plenty of room for error.
GOOGL is a high-priced stock but that doesn’t mean it’s expensive. True, that it is a four-digit price tag, but fundamentally, it is not expensive. It sells at a 33 price-to-earnings ratio, which is but a sliver of that the obviously frothy companies like Amazon.com, Inc. (NASDAQ:AMZN) and Netflix, Inc. (NASDAQ:NFLX).
GOOGL is down over 6% off the recent all-time highs, so a lot of the froth has already left the stock. If the macroeconomic thesis is still alive then the stock should soon stabilize.
However, I realize that it’s in the process of pricing in a measured bearish move upon having lost the $1030 per share level. Furthermore, I have to be cognizant that year-to-date, GOOGL is still up 27% so there could me more greens to shed; hence the need for the buffer in today’s trade setup.
GOOGL stock should not move this fast. But thanks to its inclusion in the popular acronym FANG, it now trades like the momentum stocks that make up the rest of the group. Ever since the media popularized that acronym, GOOGL is now prone to +/-2% on days where it has no headline specific to its own business. It gets caught in the FANG whirlwind.
Experts on Wall Street are still looking for better things from GOOGL stock. It is still trading at the low end of the price range and 14% below the average price target. Although it is unlikely, price needs to catch up with their expectations before the analysts change their minds about it.
The Trade: Sell the GOOGL Mar 2018 $920 put for $16. This is a bullish trade which does not require a rally to profit. Here I have an 80% theoretical chance of success. But I would accrue losses below $904.
Selling naked puts carries big risk, especially for a stock as highly priced as GOOGL. For those who want to mitigate it, they can sell a spread instead.
The Alternate Trade: Sell the GOOGL Mar 2018 $920/$915 credit put spread where my risk is limited. Yet if the spread wins would deliver 10% in yield.
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.