A bit of market-leading weakness in Alphabet Inc (NASDAQ:GOOGL) on Thursday isn’t looking good for investors in GOOGL stock. However, using the options market spread traders can profitably navigate a larger correction — and possibly a bear market that looks more like value territory for Alphabet bulls. Let me explain.
Google gave fellow FANG constituent Facebook (NASDAQ:FB) the day off as the proverbial whipping boy in leading the broader market lower Thursday with its loss of nearly 3%. For its part the S&P 500 finished off nearly 0.80%, while the tech-heavy NASDAQ gave back almost 2%.
Broader-based profit-taking was tied to rising bond yields vying for equity investors’ wallets and fickle trade war concerns switched to the on position. But GOOGL stock came under increased pressure following remarks from Vice President Mike Pence which pinned China as an election foe in 2016 and called on the tech giant to halt development of its search engine for the Chinese market.
So, what’s next for Alphabet stock? While this strategist takes most of what the White House says these days as fake news, the price chart of GOOGL stock is looking increasingly risky and worthy of investors’ respect.
GOOGL Stock Daily Chart
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Since last writing about GOOGL stock one month ago (yellow highlight) shares have continued to put together a bit of something for bulls and bears. However, an already bearish situation is now clearly favoring the latter camp and more downside in Alphabet’s immediate future.
Corrections happen. At times the action can and look bearish, but in general the pressure is a healthy opportunity for bulls as most stocks eventually reverse course to even higher prices. GOOGL stock looks representative of this type behavior.
Currently Alphabet stock has firmly established a bearish downtrend by notching a third lower high in Thursday’s decisive drop. The near 3% decline also put GOOGL back below its early January all-time-high of $1198 and appears to be supporting the case that the 11% corrective move isn’t yet over.
GOOGL Stock Bear-to-Bull Options Strategy
A doubling of the current 11% correction to 22% would put GOOGL stock into a notorious ‘bear market’ based on some technician-s 20% rule. I’m not a buyer of those type scare tactics, but I am a buyer of long exposure following that kind of healthy correction. As well, if a decline of that magnitude was to occur shares would be in a loose testing position of the $1000 level and a key fifth test of a prior high from 2017.
With shares near $1175, buying the December $1125 / $1065 / $985 long put butterfly combination for $2.70 is an interesting way to position profitably for a good portion of a larger correction, but be willing to sacrifice those gains as a buyer of shares on extreme weakness with built-in protection as Alphabet stock enters ‘value territory’ on and off the price chart.
This combination features an expiration profit zone from $1120 to $1010 which fits in nicely with what’s been described above. Within that price range the most generous profits occur at $1065 where a gain approaching $57.30 and return of over 2000% is possible.
If GOOGL stock opted to put together a bit more vigor in its corrective move and made its way to a ‘loose’ test of $1000 and the March low of $984, the spread would be down $25 or about 2% versus buying shares today. But in our view, the loss actually offers a nice spot for investors to begin accumulating shares in value, not bear territory and at a very low cost all things considered.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. . For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
