Despite the recent turbulence in the tech sector, Alphabet (NASDAQ:GOOG) stock has demonstrated resilience. As of early trading on September 8th, GOOG stock stands at $136.92, and its valuation metrics remain attractively priced. This positions it as an appealing choice for short sellers looking to profit from out-of-the-money puts.
A previous Barchart article titled “Alphabet Stock Holds Steady, Attracts Value Investors, and Short-Put Traders” discussed why GOOG stock was an affordable option at $130.67. Those points continue to hold true, making GOOG stock an appealing prospect for value investors.
For instance, GOOG stock is currently trading at just 24 times forward earnings for 2023 and 20 times for 2024, both below its historical average multiple of 25 times, according to Morningstar.
Furthermore, analysts are generally optimistic about GOOG stock, with most assigning higher price targets, as reported by Yahoo! Finance.
Shorting Out-of-the-Money Puts
In the earlier article, I recommended shorting out-of-the-money (OTM) puts at the $126 strike price, set to expire on September 15th. Given the three-week time frame, the $1.82 premium received for selling these puts proved to be a worthwhile investment.
This strategy has yielded success, as those puts now trade for just 7 cents, indicating substantial profit. Therefore, it’s prudent to consider rolling over this trade and shorting a new set of puts with a three-week expiration period.
For instance, examining the September 29th expiration option chain reveals a $1.21 premium for the $132 puts. This translates to an immediate yield of 0.917% ($1.21/$132.00) for the short seller.
Rolling Over the Short Put Play
However, some investors may find the $132.00 strike price too close to the current market price, resulting in higher risk. In such cases, opting for the $130 strike price, which is almost 5% out-of-the-money, offers improved downside protection.
The premium for the $130 strike price is 83 cents, providing a solid yield of 0.638% and enhanced risk mitigation. Additionally, if this trade is repeated every three weeks at the same price, the annualized return amounts to 7.66%. This figure significantly surpasses the existing dividend yield, which remains at zero since Alphabet does not pay dividends. Consequently, for shareholders holding GOOG shares, selling short OTM puts becomes a lucrative avenue to generate additional income.
In conclusion, GOOG stock continues to present itself as an attractive option for investors, and shorting out-of-the-money puts remains a viable strategy, complementing stock ownership.
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