Shares of Alphabet (NASDAQ:GOOGL) are hovering at a major inflection after a punishing selloff. GOOGL stock has dropped nearly 7% in just the past six trading days and is down 8.3% from the recent all-time high of $1285.50 on July 26. While always difficult to pinpoint exactly when the selling will stop, GOOGL is definitely looking much more attractive on both a fundamental and technical basis at current levels after the recent carnage.
The drubbing over the past few weeks has made GOOGL stock comparatively cheap from a fundamental basis. The P/E ratio for Alphabet is now below 30 and nearing the lowest levels of the year. Important to remember that GOOGL absolutely crushed expectations last quarter with earnings of $11.75 per share versus consensus of only $9.59 per share.
Revenues also came in much better at $32.66 billion. The combination of higher earnings and a lower stock price certainly makes GOOGL more attractive on a valuation basis after the recent drop.
GOOGL stock is getting extremely oversold on a technical basis. Nine-day RSI is now below 30 for only the third time in the past year. The previous two times readings were this oversold proved to be significant short-term lows in the stock.
Shares of Alphabet have been down six days in a row and closed just below major support at $1190. Friday provided a glimmer of hope, however, with GOOGL stock finally closing higher than the opening price for the first time in that time frame. It won’t take much of a rally for GOOGL to retake the $1190 level, which would be a decidedly bullish indication that the selling may finally be coming to an end.
Implied volatility (IV) has also spiked sharply recently, another reliable indication that the lows may be approaching. The 200-day moving average at $1121.22 should provide solid support downside support.
The recent sharp selloff has pushed IV in GOOGL options to the 59th percentile, meaning option prices are comparatively expensive. This is especially true since actual, or historic volatility (HV), is only at the 19th percentile. This favors option selling strategies when constructing trades.
So to position for GOOGL stock to find some footing near current levels, a put credit spread makes sense.
GOOGL Stock Options
Buy GOOGL Oct $1090 puts and sell GOOGL Oct $1100 puts for a $1.50 net credit.
Maximum gain on the trade is $150 per spread with a maximum risk of $850 per spread. Return on risk 17.65%. The short $1100 strike price provides a 6.5% downside cushion to the $1177.59 closing price of GOOGL stock.
Tim may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his option-based strategies can go to https://marketfy.com/item/options-and-volatility.
