Alphabet Stock is Trading Flat, But Shorting OTM Puts is Still a Good Play

Alphabet Inc.'s (GOOG, GOOGL) stock has been flat since its Oct. 29 Q3 earnings release. One profitable way to play this is to short out-of-the-money (OTM) put options, set a lower buy-in target, and get paid while waiting.

GOOG was at $173.19 in midday trading on Monday, Dec. 2, 2024. This is roughly flat from the $172.69 it traded at on Oct. 31.

This makes shorting out-of-the-money (OTM) put options a particularly good trade. The lack of volatility makes shorting OTM puts a great way to gain extra income as well as to set a lower potential buy-in target price.

GOOG stock - last 3 months - Barchart - As of Dec. 2, 2024

I discussed Google's strong earnings in my Oct. 30 Barchart article, “Alphabet's Q3 Free Cash Flow Surges - Options Activity Provide Good Income Plays.” I argued that GOOG stock was worth $244 per share, or over 40% higher. That was based on its strong free cash flow (FCF) and FCF margins.

Analysts also agree. The average price target from a survey of 60 analysts by Yahoo! Finance is $204.93. Similarly, the Barchart mean price target from analysts is $210.31.

How To Play This

I discussed shorting the Nov. 22 expiration $160 put option trading for $2.10 per put contract. This provided an immediate short-put yield of 1.31%. That turned out to be a good play.

The stock closed at $166.57 on Nov. 22, so the cash secured for the trade was not assigned to buy 100 shares. This was because the closing price was higher than $160. That made the 1.31% for the 3-week short-put play a good investment.

Investors can now repeat that trade for additional income, especially since GOOG stock has not been volatile.

Shorting OTM Puts Again

For example, the Jan. 3, 2025, expiration period shows that the $165.00 put option strike price has a $1.55 bid-side price. That provides almost a 1% immediate yield ($1.55/$165.00 = 0.94%) to the short-put investor.

This strike price is out-of-the-money (OTM) since the $165 strike price on the put side is over 4% below today's trading price. Moreover, there is a low risk of the stock falling to this level over the next month, as indicated by the low -0.23 delta ratio.

GOOG puts expiring Jan. 3, 2025 - Barchart - As of Dec. 2, 2024

Here is how this play works. The investor first secures $16,500 in cash or buying power with their brokerage firm. That money acts as collateral in case the stock falls to $165.00 over the next month and the account is assigned to buy 100 shares at $165.00 (i.e., 100 x $165.00 = $16,500).

Then, after gaining approval to do this kind of trade, the investor can enter an order to “Sell to Open” 1 put contract at $165.00 for expiration on Jan. 3, 2025. The account will then immediately receive $155.00

That way the investor has made $155 on the $16,500 investment or 0.939%. Moreover, even if GOOG stock falls to $165.00 the net breakeven for the investor is lower at $163.45 (i.e., $165.00-$1.55). That is 5.7% below today's price. So, there is good downside protection.

In addition, the investor can repeat this trade every three or four weeks and continue to make good income yields. For example, if the 0.939% short-put yield can be repeated every month for a year, the annualized expected return (ER) is over 11% (i.e., 0.00939 x 12 = 11.27%).

The bottom line is that investors can take advantage of GOOG stock's fault trading by shorting OTM puts in nearby expiry periods. That way they can gain extra income while waiting to buy-in at a lower target price.