Editor’s Note: Serger Berger’s Trade of the Day will be back on Thursday.
On and off the chart, it’s time for investors to position for some downside profit capture in Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL). But if you’re interested in vastly cutting down, limiting risk and even putting oneself in a stronger position for buying Alphabet stock more smartly; a well-positioned, long put butterfly spread may be the answer. Let me explain.
Wall Street is known for its dramatic ability to shift gears as sentiment swings back and forth from optimism to despair. But following last week’s mixed confessional and weak earnings reaction in Alphabet stock, this strategist isn’t confident investors can bullishly regroup with any lasting conviction.
As Alphabet moves into new growth markets such as the cloud, artificial intelligence and smart electronics and appliances for consumers, it comes with a definite cost. The first quarter’s sharp increase in capital spending as the company competes against more established leaders like Amazon.com, Inc. (NASDAQ:AMZN) or Microsoft Corporation (NASDAQ:MSFT) is a testament to that reality.
Bottom line — and top line for that matter — over time Alphabet’s ambitions are likely to prove fruitful for the company and its investors. But right now, that same determination is weighing on investors off the Alphabet stock chart. As for GOOGL shares, let’s just say a sympathetic fourth attempt is technically less likely to be the charm for bulls.
Alphabet Stock Weekly Chart
One of widely respected tenents in reading price charts has to do with the idea the more times support is tested, the more prone it is to failure. In looking at the weekly chart of Alphabet stock, this concept is being challenged right now.
Following three successful tests of key support tied to a prior cup-shaped base breakout, GOOGL is at it again for a fourth time. Aside from the growing and worrisome number of tests, each prior move off support has resolved itself with less upside conviction from investors, resulting in a bearish lower high pattern. The latest attempt is unlikely to be the charm.
Combined with what has been a spectacular multiyear uptrend, it’s this strategist’s view that Alphabet stock is increasingly prone to a larger and healthy correction up to 30%. That type of decline is generally par for the course for stocks like GOOGL — but also likely to agitate the skin of die-hard bulls forgetful of what more trying market conditions look and feel like.
GOOGL Options Strategy
Reviewing Alphabet stock’s options for strategies I’m favoring a defined bearish range, long put butterfly. Specifically, with GOOGL at $1041.60 the July $950/$900/$850 put combination for $3.25 is currently favored.
If shares proceed lower, there’s a very nice profit range from $853.25 all the way up to $946.75 in Alphabet. The strikes used emphasize a larger correction of around 30%, which aligns itself nicely with the discussion above. Although highly unlikely, if Alphabet stock lands squarely at $900 on expiration the trader would capture $46.75 in profit for a dazzling 1,300% return on investment.
One chief caveat with using this strategy is the possibility of losing the entire debit if GOOGL stock is below or above the butterfly at expiration. Exposure is limited to a very modest 0.34% of the current share price, but it is a risk that needs to be accepted nonetheless. However, if you’re like me and see more difficult conditions for Alphabet in the near-term, but possibly harbor buying shares at a deeper and more attractive discount; this reduced and limited risk butterfly is worth considering.
Check out Anthony Mirhaydari’s Daily Market Outlook for May 2.
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Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
