Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) is a mega-cap with incredible fundamentals. EU fines are not likely to break this beautiful story. Proof is that the dip on the news was bought and a V-shaped recovery followed. GOOGL stock now is within 3% of its highs.
This doesn’t mean that I missed the opportunity to go long. Earnings are coming and those could bring about exciting moves. We’ve seen massive moves in the past and the anticipation of those will raise the premium levels as we near the event.
But I like to set my trades early and on fundamentals. I avoid trading the short-term reactions to earnings as they are binary events, thereby making them more gambling than investing.
The thesis for today’s trade is simple especially in an uber-bullish equity market. There are very few companies with better outlooks than that of Alphabet. So if I can’t bet on it long then I don’t trade anything at all.
Today, I will share a trade to add to GOOGL longs by selling premium below levels that are not likely to come. Meaning I will sell someone a lottery ticket that I am betting will be a loser for them and profits for me.
The trick is to find support zones that are bullet-proof. With such fundamentals this should be an easy task. This would be a rinse and repeat similar to this trade that delivered $6 in free profits in two weeks.
Technically, there is risk. It’s never ideal to enter long a stock while it’s near its all-time high and after a 6% rally in as many days. But thanks to GOOGL options, I can go out far enough in time to build a large enough of a buffer to make it a safe bet.
The Trade: Sell GOOGL Dec $800 naked put and collect $8.50 per contract to open. Here I have a 90% theoretical certainty that I will retain the whole premium for maximum gains. But, it is important to note that if price falls below my strike I will have to own the shares. Consequently I could accrue losses below $791.50.
For those who do not want to take on the risk of owning GOOGL stock not even at a 17% discount I can use spreads instead. To make a credit spread, I buy an equal number of puts just below the ones I sell thereby limiting my maximum loss to the width of the spread minus what I collect to open. The risk is then by definition hedged.
The Alternate Trade: Sell GOOGL Dec $805/$800 credit put spread where I have about the same chances of success but with limited risk. Yet, the spread still would deliver 12% in yield. Compare this to buying Alphabet stock at face value and risk $976 per share then without any room for error expect a 12% rally just to match the performance of the spread.
Investing is risky, otherwise there would be no reward. However, never risk more than you are willing to lose.
Learn how to generate income from options here. 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 on Twitter at @racernic and stocktwits at @racernic.
