Alphabet Inc. (NASDAQ:GOOGL) (NASDAQ:GOOG)
Those who follow our writings daily may be surprised by today’s trade report. We were obliged to acquire tech and big-cap exposure today despite spending the previous six to nine months bringing down overweight positions towards big-cap businesses and tech names in various portfolios. So, what exactly happened?
To begin with, several of our energy stocks have done firmly in recent months. That outperformance in a sector to which we were simultaneously adding exposure quickly filled up our weightings in energy over the last quarter, and our cash inflows and options premiums have been increasing. To cut a long tale short, with a few option assignments, our cash holdings growing, and our inability to use margin substantially, our end-of-month rebalancing exercise revealed that we needed to rebalance a few portfolios with technology.
So Where Did We Look?
Regarding the large tech brands, we are overweight specific names in each portfolio, depending on which one you look at. For example, while Amazon.com, Inc. (NASDAQ:AMZN) is no longer on our buy list following its recent surge, Alphabet Inc. (NASDAQ:GOOGL) (NASDAQ:GOOG) remains on our buy list and has become an underweight holding in nearly every portfolio we manage. To be sure, this is an anomaly. Still, it is more due to management’s old thinking of not splitting the shares and our previous reliance on exchange-traded funds (“ETFs”) to help gain Alphabet (NASDAQ:GOOGL) exposure (in $2,000 increments, it is more difficult to buy one share to add marginal exposure and instead easier to add low-cost ETFs to gain the necessary exposure).
Our followers know that we are typically optimistic about advertising and media businesses. We believe that Alphabet (NASDAQ:GOOGL), like Meta Platforms (NASDAQ:META), is a powerful method to gain exposure to the digital ad industry at fair pricing. Sure, there are stocks that we have previously been highly positive on, such as The Trade Desk (NASDAQ:TTD), that also provide exposure. Still, some of these other names trade at incredibly rich multiples and include a significant amount of execution risk.
With Apple’s (NASDAQ:AAPL) actions weighing heavily on companies who rely on data to target their advertisements, we believe Alphabet (NASDAQ:GOOGL) provides us with a chance to diversify our risk among another competitor that is somewhat shielded by their operating system, platform, and physical devices. While it looks like Apple will take a piece of the ad pie from the current players, Alphabet (NASDAQ:GOOGL) appears well-positioned to continue competing on iOS while also having the luxury of Android to fall back on.
So How Did We Trade It?
While we did buy a few shares for long-term accounts (literally for minor custody accounts) that can retain these little assets for a decade or more, we were a bit more risk-averse in other versions. We chose last night to target the options with a strike price of $103 based on the recent chart, as we believed there was some support and buyers may jump in if the recent selloff persisted.
The market was up at the open, so we moved our attention to the puts with a strike price of $106, but we noticed no activity. So, finally, we decided to trade the September 16, 2022 puts with a strike price of $108/share, which was close to at-the-money, or ATM. This was not what we expected last night or at the start of the trading day, but with the premium received, it remains an out-of-the-money bet.
We collected a $2.36/share option premium, or $236 per contract. So, if the shares are allocated to us, our cost basis is $105.64/percentage. Suppose we do nothing and pocket the premium. In that case, we can buy the stock at any price up to $110.36/share without incurring any opportunity cost. Of course, if the store continues to rise, we will have to reconsider how we want to trade this name in the future. Still, for about ten days of tying up capital, we locked in an option premium worth 2.19% that could pave the way for further trades around this block of shares if they are indeed assigned to us – and we like that flexibility.
This is why we were smitten with this trade; ahead of earnings, we believe this is locked in a trading range between $103/share and $116/share, so while we would have preferred the $103 puts, we believe this is a very tradable position (especially with options) leading up to Alphabet’s (NASDAQ:GOOGL) earnings on October 26, 2022 – giving us nearly a month and a half to trade contracts if the shares are assigned to us on September 16.
Final Thoughts
This trade appears to be a winner since we took a necessary move and added optionality to it, which should result in some outperformance for our portfolios. While Alphabet’s (NASDAQ:GOOGL) stock can move fast, we like the trading range it has been in and believe that trading Alphabet (NASDAQ:GOOGL) in this range is a profitable strategy. Picking up a few option premiums on trades you need to conduct might be the difference between outperforming your benchmark or not in this unpredictable market, so taking advantage of opportunities to harvest option premiums is a requirement, in our opinion.
Featured Image- Megapixl @Ouhdesire
