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Despite the tech sell-off, Alphabet (GOOG) stock has held up well recently. In early trading on Friday, Sept. 8, GOOG stock is at $136.92. Moreover, its valuation metrics are still inexpensive. That makes it ideal for short sellers of out-of-the-money puts as an income play.
I discussed why GOOG stock is cheap in my last Barchart article on Aug. 22, “Alphabet Stock Holds Up and Attracts Value Investors and Short-Put Traders.” At the time, GOOG stock was at $130.67. Those arguments are still valid and I believe the stock remains cheap for value investors.
For example, GOOG stock is still trading for just 24 times forward earnings for 2023 and 20x for 2024. This is below is historical 25x average multiple according to Morningstar.
Moreover, most analysts have higher price targets for GOOG stock, according to Yahoo! Finance.
Shorting OTM Puts
In that article, I suggested shorting the out-of-the-money (OTM) puts at the $126 strike price for expiration on Sept. 15. Given that the expiration period was three weeks away the $1.82 premium received for shorting selling those puts was well worth the investment.
This play has proven successful as today those puts are now trading for just 7 cents. In other words, most of the money from shorting those puts has been made. It makes sense now to roll this trade over and short a new expiration period three weeks from now.
For example, the Sept. 29 expiration option chain shows that the $132 puts have an attractive $1.21 premium. That means that the short seller can make an immediate yield of 0.917% (i.e., $1.21/$132.00).
Rolling The OTM Short Put Play Over
However, for some investors the $132.00 strike price may not be conservative enough - it may have too much risk. It is only 3.61% below today's spot price.
Therefore, they may want to short the $130 strike price. This is almost 5% out-of-the-money (OTM) and provides much better risk, in case GOOG stock were to fall from here over the next three weeks.
As can be seen above the premium for the $130 strike price is 83 cents and the strike price is over 5% below today's spot price. That provides a good yield of 0.638% and good downside protection.
Moreover, even if this trade is repeated every three weeks at this same price, the return is acceptable. This is because there are 17 periods of 3 weeks in a year. So 17 x 0.638% equals 7.66% on an annualized basis.
That is significantly higher than the stock's existing dividend yield, which is zero. Alphabet still does not pay a dividend. Therefore, for shareholders who own GOOG shares, it makes sense to sell short OTM puts to gain extra income.
The bottom line here is that GOOG stock is still cheap and shorting OTM puts is a good way to play this along with owning the shares.
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.
