2018 equity markets have been eventful to say the least. Just last week we set new highs in several indices in spite of global fears of tariff wars. Some sectors are struggling from being directly in the line of fire, but in general, investors are not afraid because perceived risky tickers are strong.
We’re seeing all-time highs in momentum from unproven stocks. But on the other hand we see quality companies struggling to hold their momentum. So there is reason to worry but the macroeconomic setup in the US is too great to warrant an extended dip in quality stocks. Today I share an opportunity in Alphabet Inc (NASDAQ:GOOGL).
GOOGL stock is up 10% this year, lagging slightly behind the PowerShares QQQ Trust ETF (NASDAQ:QQQ). But that is normal because it’s indicative of a risk-on trade. Even though traders might be nervous, they are not afraid. The demand for hyper-growth risky tickers is strong almost reminiscent of the late 1990’s.
Usually, I’d worry about that Wall Street seems drunk on growth. But this time it’s different than the Dot Com bubble. This time we have solid fundamentals in the mega-tech companies so even if froth falls out of favor there should be a rotation into safety and not a crash.
Alphabet management is not sitting still. Just this morning we learned that they invested in JD.com Inc (ADR) (NASDAQ:JD) so GOOGL is not a stagnant company. They are constantly chasing new venues. In fact, in the past they were criticized for chasing new things so much that they had to split the reporting of their fringe business ventures away from their core competency.
More to that, Amazon.com, Inc. (NASDAQ:AMZN) has been the company that has threatened dozens of successful industries. Today’s JD headline could be one to stave the AMZN assault on search. Maybe GOOGL management saw the decimation that AMZN can cause on those who don’t respect it so they are making defensive moves to dig a better moat around their core business.
Fundamentally, Alphabet stock is not cheap, but given the growth it delivers it’s not bloated either. So this leaves a lot of room where I can use options to create income without much trouble. Core to my strategy is that I want to own shares but at a much lower price from here.
GOOGL is a dominant force in mobile with the Android platform but they also have several other platforms with billions of users. So they have the reach with which they can combat the potential on-slot from AMZN. This is a smart team making the right moves before they become problems.
2 Trade Ideas for GOOGL Stock
So today’s trade is one that bets on proven support to continue holding through 2018. If that happens then I would create income out of thin air and I don’t even need a rally to profit. As long as GOOGL stay above my strike then I keep my maximum gains.
The Trade: Sell GOOGL DEC $900 put and collect $8 per contract to open. I have a 85% theoretical certainty so that I retain maximum gains. Otherwise, I will accumulate losses below $892.
Those who want to mitigate the risk that comes with selling naked puts can sell spreads instead.
The Alternate Trade: Sell the GOOGL DEC $900/$880 bull put spread. Here my risk is smaller yet the spread would yield 10% on risk. Compare this with risking 1153 to buy the shares and leave no room for error.
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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
