Amidst the recent turbulence in the stock market, Alphabet (NASDAQ:GOOG) stock has demonstrated remarkable resilience, offering an appealing opportunity for out-of-the-money short sellers of its put options seeking income. As of early trading on Tuesday, September 26, GOOG stock is hovering just below $130 per share. This is merely a 5% dip from its value on September 8, the date of our previous analysis on GOOG stock when it was priced at $136.99.
Exploring Additional Out-of-the-Money GOOG Put Options
While this may appear as a break-even or even a minor loss, it’s worth considering rolling over to a new expiration period, with a focus on selecting out-of-the-money (OTM) strike prices less likely to be exercised.
For instance, in the upcoming October 13 expiration period, which is just 17 days away, the $123.00 strike price put option still commands a price of 90 cents. This would yield a 0.73% return for short-sellers (i.e., $0.90/$123.00). Importantly, if this strategy can be replicated every three weeks over a year, the anticipated return exceeds an impressive 12.4%. This calculation takes into account the fact that there are 17 three-week periods in a year.
It’s important to note that this return is theoretical, as there is a possibility of options being exercised, leading to potential unrealized losses. This occurs when the put option’s strike price exceeds the spot price, prompting the investor to purchase the stock at the strike price, resulting in an unrealized loss. For instance, if GOOG stock remains below $130 in the current week’s September 29 expiration period, the investor would be required to buy the stock at $130.
Mitigating Unrealized Losses by Shorting OTM GOOG Calls
However, there is a strategic move available to mitigate such unrealized losses. Investors can opt to sell short OTM call options in this scenario. For example, in the same October 13 expiration period, the $135 strike price call options are trading at $1.30 per contract. This strike price represents a 3.54% out-of-the-money position and offers a covered call yield of 1.01% over the current spot price (i.e., $1.30/128.56).
This means that if an investor has their $130 short puts exercised, they can subsequently sell a call option contract set to expire on October 13, earning $1.30. This action effectively offsets a significant portion of the unrealized loss incurred from the short-put trade. Additionally, it’s worth mentioning that the investor retains the original premium received from selling the initial OTM puts.
This highlights the potential for options traders to navigate the stock’s relatively moderate fluctuations and generate substantial income.
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Author Faith Yakubu