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Alphabet (GOOG) stock has held up well in the last month. It looks like good value now ahead of its earnings due to come out on Oct. 24. This is especially the case for short put traders who make money selling short out-of-the-money put options for extra income.
I described this situation with GOOG puts in my Sept. 26 article, “Alphabet Stock Holds Up Well - Ideal for Short Put Traders.” For example, the article described selling short the Oct. 13 expiration puts for the $123 strike price.
The premium received at the time was 90 cents with just 3 weeks to go before expiration. That gave investors who shorted these puts a 0.73% yield on investment. On an annualized basis (i.e., if repeated every 3 weeks for a year), the expected return was 12.4%.
Today those puts are likely to expire worthless since the price today is $138.93 per share. This means the investor has no risk of having to buy the stock at the $123 strike price. It makes sense to roll this trade over for another 3 weeks.
Shorting a New OTM Strike Price
For example, the Nov 3 expiration period is 21 days from now and reflects where the stock will be after Q3 earnings are released and have been absorbed by the market.
Look at the $130 strike price, which is 6.39% below today's price. It shows a premium of $1.52 at the midpoint. That represents an immediate yield of 1.169% (i.e., $1.52/$130) for the short seller.
Moreover, on an annualized basis that works out to an expected return of 20% annually (i..e, 1.169% x 17x). This is the result of multiplying 1.169% x 17 since there are 17 periods of 3 weeks in a year.
Here is how this works out on a practical basis. An investor can secure $13,000 in cash and/or margin with their brokerage firm. If they are long GOOG stock that will add to the margin amount.
Then they can enter an order to “Sell to Open” 1 put contract at the $130 strike price for expiration on Nov. 3. The account will immediately receive $152 in cash. Therefore, the $152 is an immediate yield of 1.169% on the $13,000 invested in the trade.
Now, if the investor is able to repeat this every 3 weeks, over a year the account will accumulate $2,584 (i.e., $152 x 17). That works out to an expected return of 19.87% on the $13K invested in this trade.
Obviously, prices will change during this period. There is no guarantee that the investor will make this return. But this shows that this is an attractive way to collect income on an investor's existing shares in GOOG stock.
It also presents a way for value buyers to potentially average into the stock should it fall to the strike price during the expiration period. That is why this is a good way to accumulate more shares in GOOG stock over time.
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.
