Alphabet Attracts Value Buyers Ahead of Q3 Earnings

Alphabet Stock

Alphabet Inc. (NASDAQ:GOOG) has demonstrated resilience in its stock performance over the past month, making it an enticing prospect for value investors as the company gears up for its Q3 earnings release on October 24. This opportunity holds particular appeal for short-put traders who leverage out-of-the-money put options to generate extra income.

Previously, short put traders received a premium of 90 cents, with only three weeks left until the options’ expiration. This translated to a yield of 0.73% on their investment. When calculated on an annualized basis (assuming this strategy is repeated every three weeks for a year), the expected return reached an attractive 12.4%.

Fast forward to the present, and those puts are likely to expire worthless, given that the current stock price stands at $138.93 per share. This means that investors face no risk of being obligated to purchase the stock at the $123 strike price. Consequently, it makes sense to consider rolling over this trade for another three weeks.

Exploring a New Out-of-the-Money Strike Price

For instance, considering the November 3 expiration date, which is 21 days away, and factors in the release of Q3 earnings, one can examine the $130 strike price. This strike price sits 6.39% below the current stock price and offers a premium of $1.52 at the midpoint. As a result, short sellers can immediately secure a yield of 1.169% ($1.52 divided by $130).

Furthermore, when annualized, this yield amounts to an impressive 20% return, reached by multiplying 1.169% by 17 (reflecting the 17 three-week periods in a year). Here’s how this plays out practically: An investor can allocate $13,000 in cash and/or margin with their brokerage firm, potentially higher if they are long on GOOG stock. They can then execute a “Sell to Open” order for one put contract at the $130 strike price, expiring on November 3. This would instantly generate $152 in cash, translating to a 1.169% yield on the $13,000 invested in the trade.

If this strategy can be repeated every three weeks over the course of a year, the account could accumulate $2,584 ($152 multiplied by 17). This accumulative return amounts to 19.87% on the initial $13,000 investment, though it’s important to note that market conditions may fluctuate over time.

While there are no guarantees, this approach presents an appealing method for generating income with existing shares of GOOG stock and allows value buyers to potentially accumulate more shares should the stock’s price decline to the strike price during the expiration period. This makes it a favorable strategy for gradually building a position in GOOG stock over time.

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