/shutterstock_1953091483.jpg)
Alphabet (GOOG, GOOGL) is up 18% since Feb. 28 as investors worried about AI chatbot competitors. Shorting GOOG stock puts to lower buy-in costs and to create income has done well and could do so going forward. Investors can lower their average cost and also generate near-term income based on shorting near-term out-of-the-money (OTM) put options.
For example, GOOG stock is now at $106.06 as of March 24 after closing on February 28 at $90.30. We had argued the stock was cheap in our previous article, “Alphabet Stock Has Tumbled But Short Put Income Plays Are Still Popular.”
After all, despite the decline in search ads, Alphabet's cloud revenue is growing quickly, leading to slightly higher revenue. Moreover, free cash flow (FCF) is strong at $16 billion for the quarter. In addition, the company is laying off 12,000 people, or about 6% of its workforce, as I noted in an earlier article when the results came out.
I argued in the Feb. 26 article that GOOG stock was cheap as it was well below the 25x historical average multiple. For example, Barchart's survey says 14 analysts have an average 2023 forecast of $5.12 earnings per share (EPS) and $6.17 for 2024. This leaves GOOG stock at 20.7x earnings for 2023 and 17.2x for 2024.
Where This Leaves Investors in GOOG Stock
As a result, investors who shorted puts as we suggested in the last 2 articles now have a long position in the stock that has an unrealized capital gain.
This is because the short put options were likely exercised at the $100 strike price for the March 3 put expiration, although their average cost was lower given the put income. However, they have also been able to short puts at $85 and other strike prices that expired March 10 as we wrote in our Feb 26 article. So the investor's position is now well below $100 with the stock at $106.06 per share today.
Shorting the $100 put strike price and lower strike prices continue to look interesting now that we are at the end of the quarter. As a result, Alphabet is likely to announce earnings by early May. That could lead to volatility in the stock, which raises its put premiums.
Shorting Puts Going Forward to Lower Costs and to Create Income
For example, the April 28 expiration put option chain shows that the $100 strike price puts trade at $2.04 per contract. This is 71% higher than the $1.19 price March 3 expiration for the same $100 strike price puts that we pointed out in our Feb 5 article.
That shows the higher implied volatility in these put premiums. Investors are worried about the upcoming results. What should we do?
One rule to follow is to always try to lower your average buying cost with OTM short puts. For example, the investor now likely has a $97 to $98 buying cost if they followed our past several articles.
Therefore it might make sense to sell short the $197 strike price puts for expiration on April 28. They trade for $1.89 per contract, and this will lower the investors buying cost further to $95 to $96. Moreover, the investor makes a good yield.
For example, assuming the investor has cash and/or margin of $9,700 in their account, they can enter in an order to “Sell to open" one put contract at the $97.00 strike price. That will immediately bring in $189 to the account. This works out to a yield of 1.95% (i.e., $189/$9700). Moreover, this put strike price is 8.5% below today's spot price of $106.06 and provides better downside protection than the $100 put strike price in terms of potentially getting exercised.
As a result, over the past several months investors following our articles on GOOG stock have been able to take advantage of the volatility in the GOOG stock price by shorting puts. In the process, they have created income and lowered their overall buying cost.
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.
