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Unusual options activity in Alphabet Inc (GOOGL) stock today highlights the underlying value in GOOGL shares. Out-of-the-money (OTM) put options in 30-day expiration puts are trading at 14 times the prior number outstanding.
GOOGL stock is trading at $158.37 per share in midday trading. This is well off its recent highs earlier in July. For example, GOOGL stock peaked at $191.18 on July 10, so it's now down over 17% from that peak.
What GOOGL Stock Could Be Worth
This was after Alphabet released its mixed Q2 earnings on July 23. I discussed this in my July 26 Barchart article, “Alphabet Shows Lower Free Cash Flow Based on AI Spending - But GOOG Stock Could Still Be Cheap.”
I showed that Alphabet's strong free cash flow (FCF) could raise its underlying value higher. That is based on an FCF projection of $67.83 billion, and using a 2.90% FCF yield, its market value could be $2,340 billion. That is 19.5% higher than its $1.958 billion market cap today.
In other words, GOOGL stock is still worth almost 20% more, or $189.25 per share (i.e., 1.195 x $158.37 = $189.25).
That highlights why today's unusual put options activity makes sense.
Unusual OTM Put Options Activity in GOOGL Stock
Today's Barchart Unusual Stock Options Activity Report shows that a large tranche of out-of-the-money (OTM) put options traded. This serves to highlight the underlying value of GOOGL stock. Let's look into this.
The Barchart Report shows that over 3,600 put option contracts traded at the $150 strike price level for expiry 30 days from now on Sept. 13. This strike price is $8.37 below the spot price of $150.00, or 5.28% out-of-the-money.
The table above shows that the bid side of these puts traded at $1.79 per contract and $1.89 in the mid-price. So, any short seller of these puts automatically receives $1.79 on their investment of $150, a put-yield of 1.1933% (i.e., $1.79/$150 = 0.011933).
In other words, the short-seller of these put options believes that GOOGL stock will not fall to $150 by Sept. 13. Or, even if it does, they are comfortable buying GOOGL shares at $150.
After all, the stock can be seen to be worth 19.5% more, as I have shown above. So, even if GOOGL falls to $150 by Sept. 13, the short sellers of these puts would be happy to be forced to buy shares at that price. (That is what short sellers of put options are required to do with the secured cash if the stock hits the strike price).
Analysts Agree GOOGL Stock Is Undervalued
Analysts have higher target prices for GOOGL stock. For example, Yahoo! Finance shows that 45 analysts have an average price target of $203.91 per share. That is over 28.7% higher than today's price.
Moreover, Barchart's survey has an average price of $204.71 in its survey of analysts. Similarly, AnaChart, which tracks sell-side analysts' price recommendations, reports that 43 analysts who have written recently on the stock have an average price target of $189.36. That is close to my $189.25 price target shown above, +19.5% over today's price.
Moreover, two of the top 5 analysts who have excellent track records on GOOGL stock have recently updated their price recommendations. This can be seen in the table below.
It shows that Colin Sebastian of Baird updated his price target 3 months ago to $200 per share and Alan Gould of LOOP Capital kept his price target of $170.00. Both of these analysts have excellent track records predicting GOOGL stock.
For example, Colin Sebastian has met his price targets over 94% of the time on GOOGL stock. In addition, Mr. Gould has a 100% track record in the Price Targets Met Ratio metric.
That should give investors some comfort that GOOGL stock may be nearing a bottom here.
As a result, it makes sense for existing shareholders to copy today's unusual put option activity. Shorting OTM puts at the $150 strike price could turn out to be a deal for them. It provides a 1.19% immediate yield with just 30 days until expiration. And if the stock rises, the investor gets to keep this income as well as any upside in the stock.
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.
