Alphabet (GOOGL) is currently showing high volatility with an IV Percentile of 73% and an IV Rank of 56%
The Barchart Technical Opinion rating is a 40% Buy with a Weakening short-term outlook on maintaining the current direction.
GOOGL rates as a Strong Buy according to 30 analysts with 4 Moderate Buy ratings and 1 Hold rating.
Alphabet has evolved from primarily being a search-engine provider to cloud computing, ad-based video and music streaming, autonomous vehicles, healthcare providers and others.
In the online search arena, Alphabet is a monopoly with more than 94% of the online search volume and market.
Over the years, the company has witnessed increase in search queries, resulting from ongoing growth in user adoption and usage, primarily on mobile devices, continued growth in advertiser activity, and improvements in ad formats.
The company is gaining market share in the cloud-computing, driven by continued strength in Alphabet Cloud Platform and Alphabet Workspace.
Alphabet also enjoys a dominant position in the autonomous vehicles market, thanks to Waymo's relentless efforts. Also, it has bolstered its footprint in the healthcare industry with its life science division, Verily.
Today, we’re going to look at a short strangle trade due to the high IV percentile.
A short strangle aims to profit from a drop in implied volatility, with the stock staying within an expected range.
When implied volatility is high, the wider the expected range becomes.
The maximum profit for a short strangle is limited to the premium received while the maximum potential loss is unlimited. For this reason, the strategy is not suitable for beginners.
GOOGL SHORT STRANGLE
Traders that think GOOGL stock might remain stable over the next few weeks could look at a short strangle.
As a reminder, a short strangle is a combination of an out-of-the-money short put and an out-of-the-money short call.
The idea with the trade is to profit from time decay while expecting that the stock will not move too much in either direction.
First, the short put which could be placed around the 15 delta. Using the April 21 expiry to avoid earnings, the 93 put could be sold yesterday for around $0.75.
Then the short call, also placed at the 15 delta. The April 21, 110 strike call could be sold yesterday for around $0.55.
In total, the short strangle will generate around $1.30 per contract or $130 of premium.
The profit zone ranges between 91.70 and 111.30. This can be calculated by taking the short strikes and adding or subtracting the premium received.
If price action stabilizes, then short strangles will work well. However, if GOOGL stock makes a bigger than expected move, the trade will suffer losses.
Conclusion And Risk Management
One way to set a stop loss for a short strangle is based on the premium received. In this case, we received $130, so we could set a stop loss equal to the premium received, or a loss of around $130.
Another way to manage the trade is to set a point on the chart where the trade will be adjusted or closed. That could be around 95 on the downside and 108 on the upside.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
On the date of publication, Gavin McMaster 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.
