Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) reported earnings last week and traders have been hating on it ever since. What is making matters worse is that the markets, in general, are in the middle of a tizzy themselves. The media is building up nervousness around rising interest rates — especially the 10 year — and have drawn an imaginary line in the sand around 3%.
I worry more about the circus that the politicians will have this week. But on both counts, these too shall pass and markets will resume trading the thesis at hand, which is bullish. If we were really worried about a market crash then we would not see stocks like Amazon Inc (NASDAQ:AMZN), which is perceived frothy, rally to new all-time highs.
We also saw a massive selloff on the Facebook Inc (NASDAQ:FB) earnings headline reverse into a big rally. All these are signs that the bulls are still in charge.
So as long as the macroeconomic thesis remains in the hands of bulls, I can buy dip in quality stocks like GOOGL. So today, I will set another winning bullish trade on the back of this dip. Keep in mind that price merely fell back into where it was just a couple of weeks ago. But in this uber-bullish environment, small dips are all we are getting.
GOOGL stock came into the earnings report with a 40% rally in 12 months, so it can afford to lose a few points without changing much. Fundamentally, GOOGL sports a price-earnings ratio of 35, which is in line with its peers. So the stock it not bloated and owning it at a discount is not likely to be a mistake for the next few months.
Management told us the usual story of great results. This time it missed on earnings but beat the top line.
There was also likely some confusion of one-time charges from the new tax laws. I am no tax expert, but I am sure that a lower tax rate going forward can only mean more money to the bottom line.
The metrics from their search revenue and costs were great and they have yet to fully monetize the billions of eyeballs on the rest of their platforms outside of search. So there is potential that it’s waiting to develop off a great and sustainable cash cow base.
I am not one to buy and hope for a rally so today I will use options instead of buying Alphabet stock in the open market and risk $1,135 with no room for error. With my set up I can build a moat around my risk to account for a few more hiccups, so I am not sweating every temporary headline.
Experts on Wall Street agree with me since they expect much higher prices. GOOGL stock is now trading well below their average price targets.
The Trade: Sell GOOGL April $985 naked put. This is a bullish trade where I collect $5.50 to open. Here I have an 85% theoretical chance of success. But if price falls below my strike then I accrue losses below $979.50.
Selling naked puts carries big risk especially for a four-digit stock. For those who want to mitigate it, they can sell a spread instead.
The Alternate Trade: Sell the GOOGL April $990/$985 credit put spread where I have about the same odds of winning but with much smaller risk. Yet the spread would yield 40% if successful.
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.
