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Alphabet (GOOG, GOOGL) stock is up over 5.69% in the last month and over 39% YTD. Nevertheless, it still looks cheap based on historical metrics. That makes shorting out-of-the-money (OTM) put options an attractive play for income traders.
For example, analysts project that the company will make $5.34 per share this year (GOOG) and $6.27 next year. So, at today's price for GOOG stock today of $124.67, this puts it on a forward multiple of 23.3x for 2023, and 19.9x for 2024.
Historical Metrics
But these metrics are significantly lower than the stock's historical average. For example, Seeking Alpha reports that the stock's 5-year historical forward multiple is 26.26x. In addition, Morningstar reports that its 5-year mean forward P/E has been 25.19x. The average of these two is 25.7x.
That means that GOOG stock is at least 19% or more undervalued. For example, the average of its 2023 and 2024 multiples is 21.6x earnings. So, dividing 25.7 by 21.6 is 1.19. This indicates that GOOG stock could rise another 19% before it reaches the average forward multiple from the past 5 years.
As a result, we can set a price target for GOOG stock at $148.35 per share. This is derived by multiplying today's price of $124.67 by 1.19x.
And remember that just gives the stock an average price/earnings multiple compared to its historical average. It would not be uncommon for the stock to overshoot this target, given its momentum lately.
One way to play this, along with holding the stock long, is to short out-of-the-money (OTM) put options. This allows the trader to both gain extra income and as well have the chance to buy in the stock automatically at a lower price should it fall. This is an easy way to average in one's cost over the long term.
Shorting OTM GOOG Stock Puts for Income
For example, the $119 strike price puts that expire on July 7 trade for just under a dollar at 97 cents. That works out to an immediate yield of 0.815% (i.e., $0.97/$119.00). This is attractive since the strike price is 4.75% below today's price and the expiration period is just over 3 weeks away (24 days).
This means that a trader who secures $11,900 with a brokerage firm in cash and/or margin can enter an order to “Sell to Open” 1 put contract at $119.00. The account will immediately receive $97.00. That is why the yield is 0.815% since $97/$11,900 invested is 0.815%. If this can be repeated each month for 12 months, the annualized return is 9.78%.
Note that more enterprising traders, who might be willing to take on more risk, can short the $120 strike price puts and receive $1.17. That works out to an immediate yield of almost 1.0% (i.e., $1.17/$120.00=0.975%). But the strike price is only 4% away from today's price. That means that the trader might be forced to purchase GOOG stock with their $12,000 invested if the stock falls to $120 or lower on or before July 7.
This could actually be a good bet since Alphabet's earnings and cash flow for Q2 won't be reported before July 7. The stock might not tank before those earnings come out unless there arises a deep fear in the market that the US economy is headed for a recession. So far, that does not appear likely. So, technically, this might be a risk well worth taking.
Either way, this shows that traders can take advantage of GOOG stock's historically cheap status by shorting near-term OTM put options.
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.
