Equity markets are at their all-time highs. Yet, there are still quality stocks that have corrected and have stayed off theirs. Case in point is Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL). Back in July it rallied to new highs, but then mega-cap stocks fell out of grace with investors, and google sold off 9% after a double top.
A dip this deep on Wall Street constitutes a correction. So today I will share a trade that will capitalize on the GOOGL swoon through the end of the year.
Technically, GOOGL stock has been defending the $920 per share level vigorously for the last four months. This is good news for the bulls, but it does create a precarious situation where if lost, this support level could bring about sub-$900 levels quickly.
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This is because below $920, there is an open gap from the April earnings report. Markets tend to want to fill open gaps. If that happens, then GOOGL could trade between $860 and $820 per share, which was the last range of consolidated prices.
Even at its highs, GOOGL stock was not expensive. It’s priced in line with the likes of Facebook Inc (NASDAQ:FB). Now it trades with a 34 price-to-earnings ratio and for a company this successful and this profitable it is a reasonable valuation. They say beauty is in the eye of the beholder, so it worries me a little bit that most analysts rate GOOGL as a buy. This leaves room for disappointments.
Furthermore, almost all other price targets are above the current price. If this situation persists, analysts tend to give in and reset their price targets lower, thereby bringing about negative headlines that could affect the actual price for GOOGL.
There are worries, but the future looks rosy. Management is not afraid to try new things and for a while it seemed that they were chasing wild ideas. But of late they are honed in on a few potential winners — the self-driving car, for example, is one of them. GOOGL stock management is a proven winner. They control several platforms that have more than a billion users each. And for all intents and purposes they are only monetizing one: Search.
Having said that, I am not one who chases upside price targets. I would much rather bet on proven history than upside potential. So today I am not hoping for a rally, but rather I will sell downside risk against levels that I don’t think will come to fruition. Pivotal to my trade setup is the fact that I am willing to own shares of Alphabet stock if they fall much further from here.
GOOGL Stock Trade Idea
The Trade: Sell GOOGL Nov $850 put and collect $7 to open. Here I have an 85% theoretical chance that price will stay above my strike so I can keep maximum profit. Otherwise, I can accrue losses below $844.
Sell naked puts in a high-ticket stock requires margin. For those who want to mitigate some of the risk then can sell spreads instead.
The Alternate Trade: Sell GOOGL Nov $850/$845 credit put spread for 50 cents, where I can yield 10% on risk but without the huge downside exposure to losses.
Investing in the stock market is risky, so I never bet more than I can afford 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 as @racernic on twitter and stocktwits.
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