Equity markets have had a difficult past few days. Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) stock for example fell 10% from the recent highs to yesterday’s lows. We have had a slew of negative headlines with more looming.
We are bracing for another wave of China tariffs to hit — and their retaliation. And we are also awaiting results from the U.S./Canada NAFTA negotiations. So caution is warranted, and the price action in stocks reflects that.
The mistake here is to quickly assume that this was the actual top. I disagree because all the macroeconomic setups still point to favorable business conditions. Companies are reporting stronger-than-ever profit-and-loss statements and healthy balance sheets. And therein lies the opportunity.
Today I am sharing a trade that is an early setup for the next wave of earnings reports from the mega-tech companies — specifically GOOGL, which should report late in October.
The uncertainties that exist today will disappear when we get the great earnings report that GOOGL will deliver next. Management still has the benefit of lower taxes, favorable interest rates (even in a rising cycle), strong consumer spending and excellent innovation into new products and ventures. I personally will be switching from traditional cable TV to the Google TV service. So they are finding new ways to grow their top lines. And this is just one example.
Fundamentally, GOOGL stock is not cheap at over a 50 price-to-earnings ratio. But it’s not bloated either, for as long as it delivers strong growth.
The stock market is also near all-time highs, so this may not be the absolute bottom. So I won’t buy the Alphabet shares and risk $1,180 without any room for error. Instead I will use options, where I can build a buffer between the current price and my level of risk.
GOOGL has a new layer of concern and it’s political. Recently the White House singled it out as a problem company. This because GOOGL did not send senior management like Facebook (NASDAQ:FB) and Twitter (NYSE:TWTR) to testify in front of a political panel.
Technically, GOOGL is lagging the PowerShares QQQ Trust ETF (NASDAQ:QQQ) and Apple (NASDAQ:AAPL) so far this year. This latest GOOGL stock dip brings it back to the neckline area from which it last broke out. Often this is necessary to make sure the floor below makes for good footing.
Today’s trade doesn’t even need a rally to profit. I can still retain my maximum gains even if GOOGL falls another 15% from here. If a rally comes then my profits materialize faster. Once the headlines abate I will add a November debit call spread to capture some of the upside hopium.
GOOGL Stock Trade Ideas
The Trade: Sell the GOOGL Dec $980 put for $11. This is a bullish trade which does not require a rally to profit. Here I have an 90% theoretical chance of success, but I would accrue losses below $969.
Selling naked puts is daunting. Those who want to mitigate that risk can sell spreads instead.
The Alternate Trade: Sell the GOOGL Dec $985/$980 credit put spread. The spread has the same odds but would deliver 15% yield on risk. Neither trade requires a rally to profit.
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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.
