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Alphabet Inc. (GOOG, GOOGL) stock has been trading flat for the past month. Existing shareholders and potential new investors can make extra income by shorting out-of-the-money (OTM) put options and setting a lower buy-in target.
GOOG is at $193.46 in midday trading on Friday, Jan. 3, 2025. That is close to where it was trading on Dec. 13, when it closed at $193.63.
I discussed this situation in my last Barchart article on Dec. 11: “Alphabet Looks Undervalued to Investors with Huge Unusual OTM Put Options Volume.” I also discussed shorting OTM puts in a Dec. 2 Barchart article.
Price Targets Higher
I showed that GOOG stock could potentially be worth as much as $253 per share. That was based on a 20% FCF margin applied to analysts' 2025 revenue estimates and also a 2.5% FCF yield metric.
Moreover, since then analysts have been hiking their target prices. For example, Yahoo! Finance now shows that analysts have a $210.38 price target, up from $206.69 as I wrote in my last article.
In addition, AnaChart.com, a site that tracks analysts' price targets over time, shows that the average of 43 analysts is $215.85 per share. That result is up from $208.38 last month.
In other words, analysts now expect to see GOOG stock float higher. I suspect it could eventually reach my higher target price.
One way to play this, for existing investors, as well as potential new shareholders, is to sell short out-of-the-money (OTM) put options. That way the investors can make money while waiting for the stock to dip.
Shorting OTM Puts
In my Dec. 2 article, I discussed selling short the $165 strike price put expiring today, Jan. 3. Given that the price today is over $193, these puts are likely to expire worthless.
That means that the $1.55 in income is not only kept, for a one-month yield of almost 1.0% (i.e., $1.55/$165 = 0.94%), but the investor had no obligation to buy shares at $165.00.
This trade can now be repeated for more income and to set a higher buy-in target price.
For example, look at the Jan. 31, 2025, expiration period. It shows that the $185 strike price put options have a premium of $2.83 per put contract.
That gives the cash-secured put short seller an immediate yield of 1.53% (i.e., $2.83/$185.00 = 0.015297).
This means that an investor who secures $18,500 in cash or buying power with their brokerage firm can enter an order to “Sell to Open” 1 put at $185.00 The account will then receive $283.00 immediately. That works out to 1.53% of the investment.
As long as GOOG stays over $185.00 by Jan. 31 the account will not be assigned to buy 100 shares of GOOG for $18,500.
Note that this strike price is 4.40% below today's trading price. The delta ratio is -0.273, implying that there is just a 27.3% chance of this occurring.
However, for more risk-averse investors, the $180 short put play is almost 7.0% below today's price. That investment yields about 1.0% (i.e., $1.78/$180.00 = 0.009888).
The bottom line is that GOOG stock looks undervalued with higher price targets. One way to play this, to make extra income for existing investors, and to set a lower buy-in target for new buyers, is to short out-of-the-money (OTM) strike price puts.
