Alphabet Stock Has Attractive Short-Put Yields As GOOGL Stock Treads Water

Alphabet, Inc. (GOOGL, GOOG) stock is attracting short-put investors for attractive one-month yields, as GOOGL stock has been treading water for the past three months. For example, a 5% lower GOOGL put has a 1.50% one-month yield.

GOOGL closed at $345.90 on Friday, Aug. 14. That's down from a recent high of $377.65 on Aug. 4, but up from a trough of $317.69 on July 23. The chart below from Barchart shows that the stock has been in a range for the past 3 months.

Analysts' Price Targets

Moreover, analysts have significantly higher stock price targets (PTs). For example, 64 analysts surveyed by Yahoo! Finance have an average PT of $428.04, or +23.7% higher. Similarly, Barchart's mean survey PT is slightly higher at $430.56 (+24.5%).

Moreover, AnaChart shows that since Alphabet's last earnings release (July 22), 13 analysts on GOOGL stock have written new reports. The range for those with BUY recommendations (i.e., 10 reports) is between $395 and $515, or $455 on average. 

That's almost $100 over Friday's close, or +31.5% potential upside in GOOGL stock over the next year. 

As a result, the range of these three surveys is between $428 and $455, or $441.50 (+27.6%).

That makes it worthwhile to set a lower buy-in by shorting out-of-the-money cash-secured (OTM) puts.

Shorting OTM Cash-Secured GOOGL Puts

For example, the Sept. 18 expiry period (32 days to expiry) put option chain shows that the $330.00 strike price put (i.e., 4.6% below Friday's close), has a midpoint premium of $4.95.

That means that an investor who posts $33,000 in cash or buying power can immediately earn $495.00. In other words, the one-month yield is 1.50% (i.e., $495/$33,000).

This is attractive to investors since the delta ratio is low, i.e., -0.265, implying just a 26.5% rough likelihood that GOOGL will drop to $330 by Sept. 18.

Moreover, an investor can repeat this trade each month. The expected return (ER), assuming the same yield can be made each month, is 18% (i.e., 1.5% x 12). That is equal to 2/3rds of the 27% upside in price targets above.

Downside Risks

But, even if GOOGL drops to $330 on or before Sept. 18, the worst-case is that an investor's collateral ($33K) will be assigned to buy 100 shares at $330.00. Given that the $495 income is already in the account, the net breakeven is:

  $330 - $4.95 = $325.05 breakeven

That is 6.0% below Friday's close, so it provides good downside protection.

Moreover, given the potential PT between $428 and $455 (see above), or $441.50, the potential upside for value investors using this method to buy GOOGL shares is:

  $441.50 / $325.05 -1 = +35.8%

The downside risk is that GOOGL could drop below this breakeven point. But that would entail an unrealized loss. The investor could hold on, wait for the stock to rise, or also sell short covered calls at higher prices to mitigate the loss.

The bottom line is that value investors find shorting cash-secured out-of-the-money GOOGL puts is one way to set a lower potential buy-in and also get paid while waiting.