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Alphabet (GOOG) stock has held up well during the latest stock market selloff. This bodes well for out-of-the-money short sellers of its put options, who make income selling near-term puts for income. In early trading on Tuesday, Sept. 26, GOOG stock is just below $130 per share.
This is only about 5% below where it was on Sept. 8, when I last wrote about GOOG stock. The stock was at $136.99 when I wrote the Barchart article, “Alphabet Stock Is Still Cheap, Especially for Short Sellers of Its Puts.”
I had suggested that shorting the $130 strike price put options for expiration on Sept. 29 would be worth the 83 cents premium that could be made by selling those puts. Today, those puts trade for just below that original premium.
Selling More OTM GOOG Puts
Although this is a net zero profit or even a slight loss, it might make sense to roll this over to a new expiration period. The key is to pick out-of-the-money (OTM) strike prices that might not get exercised.
For example, for the Oct. 13 expiration period, which is 17 days from now, the $123.00 strike price put option still trades for 90 cents. That can provide a short-seller a 0.73% yield (i.e., $0.90/$123.00).
Moreover, if this trade can be repeated every 3 weeks for a year, the investor can make an expected return of over 12.4%. That is because there are 17 periods of 3 weeks in a year.
Now, obviously, this is a theoretical return, and sometimes the options will be exercised, which can potentially cause an unrealized loss. That happens when the investor's put option strike price is higher than the spot price and the put gets exercised. In this case, the investor has to purchase the stock at the strike price and there is an unrealized loss on the trade.
For example, in this week's Sept. 29 expiration period, if GOOG stock stays below $130, the investor will have to purchase the stock at $130.
Shorting OTM GOOG Calls
Nevertheless, the investor can turn around and sell short OTM call options in this situation. That could help ameliorate the unrealized loss.
For example, for the same Oct. 13 expiration period, the $135 strike price call options trade for $1.30 per contract. That strike price is 3.54% OTM and provides a covered call yield of 1.01% over today's spot price (i.e. $1.30/128.56).
This means that if an investor gets their $130 short puts exercised they can turn around and sell one call option contract for expiration on Oct. 13 and receive $1.30.
That covers most of the unrealized loss from the short-put trade. And don't forget that the investor also kept the original premium received from selling short the OTM puts.
This shows that given the relatively modest movements of GOOG stock, options traders can trade around the volatility of the stock and make good income.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
