For the past few days, the stock market has been in relative turmoil. Since last week, equities have fallen sharply on renewed fears of rising bond yields. The 10-year yield is now up to 3.25% with no let-up in sight.
Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) has its own situation going on. Its stock came under more pressure yesterday after news broke of a possible data breach in Google+. There were also reports that Alphabet tried to cover it up.
This will weigh heavily on the stock this week. We saw what similar news did to Facebook (NASDAQ:FB) stock recently. Privacy is now a sensitive issue to investors.
To make matters worse, GOOGL also decided to announce that they will stop competing for a $10 billion lucrative Pentagon cloud contract. I’m not a fan of companies that make social decisions that negatively impact the bottom line, but we’ve seen Google do this before by opting out of China’s market completely.
Fundamentally, I still believe in the company’s future. This is a cash cow that dominates advertising, especially on mobile. They do have competition, especially from Amazon (NASDAQ:AMZN) which is quickly climbing the ladder of dominant advertisers on the web. This is not a competitor I want to take lightly. Amazon has a history of seriously impacting the profit-and-loss statements of its competitors. And therein lies opportunity.
Management at Alphabet has proven successful, so they are up to the task. They have other assets with tremendous potential that they can deploy. GOOGL is also a leader in autonomous autos. This is the future of driving and most likely very lucrative.
Fundamentally speaking, from a price-to-earnings ratio it’s not a screaming buy, but it’s not bloated either. So owning GOOGL stock at a discount from current price is not likely to be a major financial disaster. I’m confident that in the long term, I would be able to manage out of a Google position with profits.
Technically, it is testing a neckline area that served as a breakout three months ago. Often these serve as support for a bounce. However in this case this is happening with increasingly inflammatory headlines, so the outcome is still unsure. If GOOGL falls below $1,140 per share then it could easily fall another 90 points in there. While this is not a forecast, it is a scenario for which I need to be ready.
This is a rinse-and-repeat trade for me from as recently as a month ago, so I come into it with profits in hand.
GOOGL Stock Trade Ideas
The Trade: Sell the GOOGL Mar 2019 $860 put for $8. Here I have a 90% theoretical chance of success. Otherwise, if the price falls below that level then I would suffer losses below $852.
Those who want to mitigate the risk that comes with selling naked puts can sell spreads instead.
The Alternate Trade: Sell the GOOGL Mar 2019 $880/$860 credit put spread, where my risk is limited. Yet if the spread wins, it would deliver 10% in yield.
It is important to note that today’s trade doesn’t need a rally to profit. I simply need support for GOOGL stock to hold for the near term. Time will then do the heavy lifting and premiums will expire in my favor. But just in case, I have to be ready to own the shares at that level.
Click here for more of my market thesis and get an ongoing free copy of my weekly newsletters.
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.
