This past weekend, 60 minutes aired a contentious story about Alphabet Inc (NASDAQ:GOOGL,NASDAQ:GOOG). The overall message was that the company could face a $4.5 billion anti-trust fine in Europe. The concept is not new. This has been going on since the 90s with companies like Microsoft Corporation (NASDAQ:MSFT).
The concept has not changed since then but this time there is a twist. The headline is wrapped in a blanket of privacy issues stemming from the recent Facebook, Inc. (NASDAQ:FB) debacle. The mess that FB created is an opportunity that is too enticing for regulators. In the end, they accuse GOOGL of manipulating its search results to favors its products and services.
I am a fan of GOOGL as an end user because I enjoy all their services for free. There is a price I pay with privacy but so far it’s been a benign cost. I have also used GOOGL advertising services for business. There I wasn’t happy paying for the clicks. But it was because I was competing for keywords; the service did not seem manipulated.
This morning I was prepared to buy the dip in Alphabet stock but the stock is up. So this is an indication that investors are not worried — and therein lies my opportunity.
Recently, GOOGL stock has been too volatile. It’s had three +/-15% moves, and for a company this stable in its earnings that’s too much. The macroeconomic conditions still favor the bulls in 2018 and there is no scenario that I see where GOOGL falls as equity markets rally.
Fundamentally, GOOGL carries a high-ticket value but is fairly valued among its competitors. It sells at a 30 price-to-earnings ratio which is cheap for a growth company. This is cash machine with many billion user platforms that are yet to be monetized. They are also leaders in driver-less technology and that could be a sleeper for future profit center.
Last October, GOOGL stock emphatically broke out from the $1,000 level. Unfortunately, the February market correction killed the rally and has since tested the breakout line as support. The good news is that $1000 has held as support under tremendous pressure so it should serve as footing for another rally.
But instead of chasing the hopium, I use options to generate profits without any cost today. We are still in a headline trading environment and those dangerous especially when GOOGL stock carries such a high ticket price. By using options, I structure my trade to leave some room for error. This is important because if the bears succeed in breaking the $1000 support then they can overshoot lower to retest the $920 zone.
Most Wall Street analysts agree that there is more upside than downside. GOOGL stock is a buy by most accounts and it trades much lower than the analyst price ranges. There are issues at hand stemming from privacy fears and antitrust suits but overall, the company is on rail and will overcome most headline shocks.
Two GOOGL Trade Ideas
The Trade: Sell GOOGL AUG $900 naked put. This is a bullish trade where I collect $4.20 to open. Here I have a 90% theoretical chance of success. But if price falls below my strike then I accrue losses below $896.
Selling naked puts is daunting. Those who want to mitigate that risk can sell spreads instead.
The Alternate Bet: Sell GOOGL AUG $920/$910 credit put spread. The spread has the same odds but would deliver 10% yield on risk. Neither trade require a rally to profit.
Today’s trade doesn’t need a rally to profit — although it would benefit from one. I merely need GOOGL stock to hold its support for the next few months. I am betting that the value in the stock will prevent sellers from taking too far. It is important know that if they do, then I want to own the shares at a discount from here.
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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.
