The stock market has had two 10% correction since the start of February. Investors were first spooked by the impression of runaway rates. The first bounce was sharp but it got thwarted when we got bombarded by a slew of headlines from the White House that raised concerns of trade wars and protectionism.
Just this morning we get another leg lower on the release of specific tariff targets. GOOGL, even though it officially pulled out of China years ago, is also down another 2% on the headline.
Alphabet Inc. (NASDAQ:GOOG, NASDAQ:GOOGL) comes into this with extra baggage. The stock has been suffering added downside pressure from the Facebook, Inc. (NASDAQ:FB) headlines. This raised the concerns of new legislation against social media stocks. GOOGL and Twitter Inc (NYSE:TWTR) were two that were hard hit by association.
The threats are real but I bet that the end result will not be a game changer that would kill the bullish thesis in GOOGL. While it is a social media company, it is still mainly a search company. It is also obvious to the users that the search contents are not private and that they will be used for marketing purposes. FB’s situation is different. There users expect privacy.
Under current macroeconomic conditions, GOOGL will be higher in the future than now. The problem is that we have short term threat to stocks prices. The Trump tweets are coming fast and furious. Take Amazon.com Inc (NASDAQ:AMZN) for example. The stock has been a seesaw from the White House related headlines. These cause ripples across the Alphabet stock.
Fundamentally, GOOGL stock sells at a 55 price-to-earnings ratio which is not cheap from an absolute perspective. But it’s not bloated either. It has excellent growth to justify it. Aside from search, the company has several multi-billion user platforms that are potential future cash cows so the upside potential is real.
Technically, year-to-date GOOGL stock is down 6% but that is inline with the segment. There are no company-specific issues causing the selling. Most of the bad days have been on inflammatory headlines. Eventually, those will abate and we will go back to trading the solid fundamentals that we have. And therein lies my optimism.
Although I am bullish GOOGL in the long run, for the short term I have to be cautiously optimistic. Using options I can set trades that accomplish just that. Instead of buying the shares outright and risking $1000 with no room for error, I will try to generate income out of thin air.
In other words, I have more faith in the downside support than the immediate upside potential. I don’t even need a rally to profit. The worst that could happen is that I could own GOOGL shares at a sharp 20% discount from current levels.
The Trade: Sell GOOGL JUN $800 naked put. This is a bullish trade where I collect $6 to open. Here I have a 85% theoretical chance of success. But if price falls below my strike then I accrue losses below $794.
Selling naked puts carries big risk especially for a stock price tag as big as this. For those who want to mitigate it, they can sell a spread instead.
The Alternate Trade: Sell the GOOGL JUN $800/$795 credit put spread where my risk is limited. If the spread wins would deliver 10% in yield.
Get my free newsletter and subscribe to my YouTube channel 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.
