GOOGL Put Options Offer Good Value To Bullish Alphabet Investors

Alphabet (GOOG, GOOGL) now looks like a good bargain, trading at just 18x next year's projected earnings. This makes its forward out-of-the-money (OTM) put options good short bets to create income with GOOGL stock.

For example, analysts now project that earnings next year will rise from $4.79 per share to $5.42, a 13.15% gain by the end of 2023. So, at $98.46 for GOOGL stock, which is slightly cheaper than GOOG stock ($98.82), the stock trades for just 18.2x 2023 forecast earnings.

Undervalued Stock

This is well below its average multiple of over 27x in the last five years. In other words, just to get to its average P/E multiple the stock could rise over 50% from here (i.e., 27.4x/18.2x-1=+50.5%).

Moreover, the company is generating large amounts of free cash flow (FCF). In its latest earnings report on Oct. 25, Alphabet reported that its FCF hit $16.077 billion in Q3 alone. That worked out to over 23.3% of its $69.1 billion in revenue for the quarter. At that pace, Alphabet could generate over $72.2 billion in FCF next year, based on $309.9 billion in revenue forecasts.

This is important since Alphabet's market capitalization is $1,280 billion. As a result, the $72.2 billion FCF works out to just 17.7x FCF (i.e., $ 1,280 b/$ 72.2 b). That is very low and could easily rise to over 20x to 25x next year, or 13% to 41% from here (i.e., 25x/17.7x).

As a result, investors are now eyeing the stock's put options. They have high premium prices and are worth shorting on a cash-secured basis, thereby creating income for investors. This is also important since Alphabet still does not pay a dividend.

Shorting GOOGL Puts to Create Income

For example, look at the Barchart put option chain for Dec. 30 below. It shows that even for the $94.00 put strike price, which is 4.5% below today's price (Nov. 23) of $98.42, the premium is almost $2.00 ($1.97) per put contract.

That means that an investor who puts up $9,400 in cash with their brokerage firm and then shorts the $94.00 put option, will immediately receive $197.00. That works out to a yield of over 2% (i.e. $197/$9400 = 2.095%). That is equivalent to an annualized return of just under 25% since the option expires in just 38 days. It also helps that there are over 6,000 put contracts at this strike price, which indicates that there are a lot of investors who believe the stock could rise significantly from here.

By the way, the GOOG stock put options for Dec. 30 at this $94.00 strike price trade at just $1.84 per contract. This is well below the GOOGL price of $1.97. There are only 46 contracts at this strike price. So, the GOOGL puts are much more attractive.

Low-Risk Way to Buy GOOGL Stock

The bottom line is that many people are shorting these puts, as they don't expect GOOGL stock will fall below $92.03, which is the breakeven price (i.e. $94.00-$1.97). That means the stock would have to crater over 6.5% from here. Given how cheap GOOGL stock is now the probability of that occurring is not high.

For more conservative investors who might want to protect their downside, they could use the $1.97 premium received to buy the $90.00 strike price puts for $1.10 (see above option chain). That means that they still collect a net premium amount of 87 cents (i.e., $1.97-$1.10). This reflects a decent 0.926% yield (i.e., $0.87/$94), or almost 1.0%, reflecting an annualized 11.1% run rate yield. Granted they would still have the risk that the stock could fall below $94.00 by or on Dec. 30 and the investor would be forced to buy 100 shares. But the breakeven would be $93.13 (i.e., $94.00-$0.87), or only $3.13 of risk since the investor also owns long puts at $90.00. 

In addition, the investor could immediately turn around and sell covered calls based on the shares that were purchased at $94.00. This allows the investor to try and make that $3.13 of potential unrealized losses back (assuming the stock fell below $90.00). That is a relatively low-risk way to buy GOOGL cheaply here.

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