This week started on a somewhat of negative note for stocks. But all eyes are now on earnings to see how markets will end. There is a long train of mega-cap companies reporting this week, and mathematically they have the weight to sway Wall Street in either direction.
Case in point last night Alphabet Inc (NASDAQ:GOOGL) reported earnings. The stock spiked on the headline but faded in the after-hours trading. While investors are still deciding what to do with this great company, they are celebrating others who are rallying thereby lifting indices higher. This could sway GOOGL bulls to commit upward. Long term it’s headed higher!
Management reported a beat on the top and bottom lines. So on the face of it, GOOGL stock should rally. But there were concerns over traffic costs. Investors ignored all the good news to focus primarily on some margin line items.
The upside of this is that during a time when all experts are concerned about privacy issues, there was hardly any mention of carry-through from the Facebook, Inc. (NASDAQ:FB) debacle. So, having only complaints of transient higher traffic cost is a win for GOOGL bulls. And even then, management confirmed that these levels will subside in coming quarters.
Fundamentally, GOOGL stock is not bloated. It’s priced well within its competition and it remains a giant cash cow. Furthermore, they have several different platforms that have not yet been monetized not to mention their forays into autonomous driving. And therein lies tremendous upside potential.
These are nervous times, so betting purely on upside “hopium” is a risky proposition. We have a slew of looming headlines spanning from geopolitical risk, to global tariff wars with China, Europe and Russia. So there is cause for short-term worry. Risking $1,070 per share with no protection is scary.
So until the air clears up, I favor using options to mitigate my out-of-pocket risk while trading Alphabet stock today. Technically, Google has shed a lot of froth since it’s January highs. Thanks to the February equity correction, GOOGL fell 15% twice. It recovered from its initial rout in late February, and it was in the process of doing it again going into its earnings report.
What happens from here will depend largely on Wall Street sentiment. Meaning, if traders are becoming less worried about White House tweets, then GOOGL bulls will have the courage to buy the stock higher.
But just in any case they don’t, my bet today is that recent support will hold through 2018 rather than anticipating a rally. There are several levels that would be great entry points for GOOGL stock under the current macroeconomic environment.
So, I sell risk against others’unrealistic fears. This will generate income without any out-of-pocket risk and leave plenty of room for error.
The Trade: Sell GOOGL Aug $800 put and collect $5 per contract to open. I have an 85% theoretical certainty so that I retain maximum gains. Otherwise, I will accumulate losses below $795.
Selling naked puts is daunting especially during these unstable headline periods. Those who want to mitigate that risk can sell spreads instead.
The Alternate Trade: Sell GOOGL Aug $840/$830 bull put spread where I have the same odds of winning. Then the spread would yield 10% on risk.
There are no guarantees when investing in stocks, so I never risk more than I 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 as @racernic on twitter and stocktwits.