The equity markets have just had a mini tantrum. We saw six days of red opens and it felt like the markets were in full turmoil. Yet the scoreboard showed barely a scratch. The PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) was only 1.7% off its all-time highs on Wednesday. And after Thursday’s rebound, it set a new high.
Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), like the whole FANG herd, fell 3.2% high to low during this brief malaise. It only lasted mere days, but was the longest in a while. Here it is now sitting less than 1% from its closing high.
Although I don’t like to chase all-time highs, today I want to add to my bullish exposure to GOOGL stock. I have been doing this successfully for months, and it’s the only way I can justify risking money this late in the game.
Conversely, I am not one to call for a crash — although one can occur at any time. I will continue to go long Alphabet stock but leave plenty of room for error.
The important premise to my style of trading is that I believe in the long-term viability of the company and that I am okay owning the shares should the worst case scenario happen to my trades.
Fundamentally, GOOGL stock is now even cheaper than I thought it was the last time I traded it. It reported a great quarter and the metrics are now even more favorable to value. It has a price-to-earnings ratio of 35 which is inline with like-minded companies say Facebook Inc (NASDAQ:FB). From that perspective it’s definitely more expensive that Apple Inc. (NASDAQ:AAPL) but in all fairness GOOGL has always commanded a premium to AAPL on Wall Street. Perhaps traders like having its forays into more exciting venues on the horizon.
Technically, even though GOOGL stock is near its all-time high, it looks like it has plenty of room to rise and stay inside its ascending standard regression channel. Meaning that I fail to see an obvious downside pressure or strain from the daily chart.
The $1,000 mark is not only a big psychological level, in this case it’s also the major pivot of the most recent earnings report. I will make it my short-term mark.
Click to Enlarge Consensus from Wall Street is that GOOGL stock price still has a long way to go. Even up here it still is about 9% below the average price target and 25% under the high mark. Almost all of the analysts who cover the stock have it as a buy.
Although this is uber-exuberance, my trade setup leaves plenty of room for error just in case we are going to have some disappointments in the coming weeks. The bottom line is that I’d like to own it so I will sell puts in it for the privilege of owning the shares lower. Otherwise I would have created income from nothing.
GOOGL Stock Trade Idea
The Trade: Sell GOOGL Dec 29 $1000 put for $7.50. Here I have an 80% theoretical chance of success. Otherwise and if price falls below it then I would suffer losses below $992.50.
Selling naked puts carries big risk especially for a stock as costly as this. For those who want to mitigate it, they can sell a spread instead.
The Alternate Trade: Sell GOOGL Dec 29 $1,000/$990 credit put spread. The spread has the same odds but would deliver 15% yield on risk. Neither trade require a rally to profit. In fact the stock can fall an additional 5% and I could still retain maximum gains.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose
Get my newsletter for free 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.
