2018 has so far been the year of trading headlines. Wall Street investors fear the potential of global tariff wars. President Donald Trump is intent on renegotiating all of the major U.S. trading setups. The end goal would be a good thing but the process is daunting.
Nevertheless, segments of the stock markets are still setting new all-time-high levels and fear remains very low as measured by the VIX. This makes the potential hiccup big if not for solid company fundamentals.
Last night, Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) reported earnings the stock jumped 5% on the headline. They crushed expectations and delivered a solid beat. Investors even ignored the European Union $5 billion fine because GOOGL showed that it dominates search and it still is a cash cow with no end in sight.
We now live in a world that is connected. The use of smartphones is becoming ubiquitous on a global basis, so the demand for search is increasing exponentially. So far, Google is the default resource for that. In most cases, it has become the generic term to mean “search” much like “Kleenex” replaced “tissue paper.”
GOOGL stock carries a high ticket price but it’s not expensive. It sells at a 31 price-to-earnings ratio which is in line with other mega-caps who have similar growth statistics. It is expensive if you compare it to Apple (NASDAQ:AAPL) but that is a case of AAPL being undervalued more than GOOGL being bloated.
Technically GOOGL stock has had a $1,200 per share roof, but this push higher may be the burst it needs to shatter it. However, chasing stocks at all-time highs does not make for an ideal entry point, which is why today’s trade is one that doesn’t even need a rally to win.
I am very optimistic about GOOGL for the long run. But for now, we are still vulnerable to headlines, which are indiscriminate when they cause market panics. So I am more confident in proven support levels than I am interested chasing short term upside hopium.
In addition to headlines, there are more earnings to come, and they too can temporarily impact Alphabet stock.
Of the remaining large-cap companies still left to report, Amazon.com (NASDAQ:AMZN) has been the poster child for bullishness of late and it will drive the price of the FANG gang plus stocks like AAPL and Microsoft (NASDAQ:MSFT). Combined, they account for more than half of the Nasdaq and are heavyweights in the other large-cap indices.
If AMZN disappoints, it could trip up the GOOGL rally. But since Alphabet already delivered its crushing results, the potential dip should be temporary. So I am confident selling downside risk against proven support and solid fundamentals.
The opportunity today lies in profiting off what other investors fear. I am confident that even if the result here is that I own GOOGL shares at a deep discount, I will profit from them in the long run.
GOOGL Stock Trade Ideas
The Trade: Sell the Dec $1,030 put and collect $10 to open the trade. Here I have 90% theoretical odds of success. But if Alphabet shares fall below my strike price, then I will accumulate losses below $1,020.
Selling naked puts in such a high-priced ticker is daunting. I can mitigate this risk by selling spreads instead.
The Alternate Trade: Sell the Dec $1,040/$1,030 credit put spread, where I have about the same odds of winning. Then the spread would deliver 10% yield. Compare this with needing to risk $1,250 to buy the shares and hoping for a rally. Here I have a buffer and no out-of-pocket risk.
Investing in the equity markets is always risky, so don’t bet more than you can afford to lose.
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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.
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