In-the-Money GOOG Options Still Look Attractive To Value Buyers

Alphabet (GOOG) is set to announce its earnings on Feb 2. The stock has been rising as markets expect good numbers. Value buyers are looking at in-the-money (ITM) calls to play this for long-term gains. I described this ITM play in an earlier article this month, and so far it seems to be working out.

For example, today, Jan. 16, 2023, GOOG stock is trading at $92.80. That is up significantly from the price of $88.73 on Jan. 2, when we saw investors buying ITM March 17, 2023 calls at the $85.00 strike price for $8.48 per call option. That means that the breakeven price for the ITM call buyers would be $93.48 (i.e. $85.00 strike price plus $8.48 premium). 

At the time there was just $3.73 of intrinsic value since the calls were worth this much at the price then (i.e., $88.73-$85.00). Now there is $7.80 per call of intrinsic value, since the stock is almost there now, almost all of the extrinsic premium has been used up. And there is still plenty of time for the play to work out.

Updating the Trade

At the time I suggested shorting out-of-the-money puts to be able to cover most of the extrinsic value, in case GOOG stock stayed flat. That provided $5.40 in income at the $85.00 strike price for Jan. 27. So, now as it stands, those puts are worth significantly less at just 21 cents.

So, now investors with the original trade have a clear profit since the profit from the short put is $5.18 (i.e., $5.40-$021), less the slight loss on the call purchase of $0.68 (i.e., $92.80 - $93.48 breakeven). This represents a profit of $4.50 (i.e., $5.18-$0.68) or $450 per call option purchase. That is a gain of 53% on the original $8.48 purchase price of the ITM GOOG calls.

Now, most of the value has been extracted from the put trade, so investors might consider rolling this over.

This is done by putting in an order to “Buy to Close.” That will cost 21 cents on the ask side, but now investors can short a March 17. Then the investor can short the Feb. 17, $85.00 puts and immediately receive $1.45 at the mid-price.

This represents an immediate yield of 1.70% since the $1.45 in income represents 1.70% of the $85.00 per share potential purchase price if the stock falls to this level by Feb. 17.

Moreover, some investors may want to put on another medium-term in-the-money GOOG call purchase. After all, the investor may already have a nice profit. But even with the $1.45 put trade, this allows the investor to cover much of the extrinsic value for a new call purchase. 

For example, the April 21, 2023 expiration $90.00 calls cost just $8.23, similar to the prior purchase for $8.48 of the March 17 $85.00 calls. This means the breakeven for the call investor will be $98.48 per share for GOOG stock, which already is at $92.80 today. So there is $2.80 in intrinsic value (i.e., $92.80 price today-$90.00 strike price), and $5.68 in extrinsic value.

This time, however, the short put income of $1.45 does not completely cover that extrinsic value. In fact, the investor might want to short the $90.00 puts and collect $2.89 (see the options chain above). If you are relatively bullish on the stock, given that earnings are coming out on Feb. 2, this might make sense. That will leave just $3.00 in extrinsic value not covered. But there is plenty of time left for the investor to make this up. For example, the investor could short March puts as well as April puts once the Feb. 17 puts near expiration.

This shows how the investor can play the upcoming earnings announcement for Alphabet with in-the-money calls and short put plays. 

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