We Look at Goog’s Impressive Run and an Appealling Hedging Strategy
Google’s parent company, Alphabet Inc., has been on an impressive six-month run, with its stock gaining 25.9%, outpacing the broader market’s 10.6% increase, as you can see in the table below. However, the stock may face some headwinds in the short term, especially after such a substantial rise. Recent evidence suggests a weakening performance, with a two-week decline of -4.3%, compared to the market’s -3% decline, marking an underperformance of -1.3%. In light of this scenario, let’s explore an attractive bear call spread strategy that has been highlighted by the marketchameleon system. This strategy is designed to benefit from a flat to declining stock price outlook for Google over a one-month horizon.
The Goog Bear Call Spread Set Up
Sell 20-Oct-23 132 Call
Buy 20-Oct-23 134 Call
Market Price: credit $0.97
Why We Like This Spread:
Great Potential Return
If Google’s stock remains below $132 within the next 20 trading days when the options expire, this strategy will yield a remarkable +94.2% return on the amount at risk. Given that the stock is already below that price point, as long as it remains flat or declines, this strategy will prove to be highly profitable.
By conducting a historical analysis of Google’s stock performance, we estimate a fair value of 0.81 cents for this spread. In essence, if the stock behaves similarly to its past performance, the long-term average value of this spread is approximately 0.81 cents. Currently, you can secure a credit of 0.97 cents, implying that you are theoretically getting a favorable deal on the trade. This added cushion can provide additional security if the trade faces adverse movements. The theoretical edge is estimated to be around 15.7%.
In the event that Google’s stock soars beyond $134, the loss on this spread is capped because you are protected by the purchase of the 134 Call option. If the stock rises above this level, the spread would be worth $2. Since you collected 0.97 cents in credit upfront, your maximum loss would be limited to $1.03.
While we cannot be certain of the precise direction of Google’s stock price in the coming weeks, the call spread highlighted by the marketchameleon system offers an appealing way to mitigate or hedge downside risk. This strategy is priced with an extra risk premium and comes with limited risk in case the stock experiences a significant surge beyond our upper strike price. Whether you are looking to capitalize on a potential decline in Google’s stock price or protect your existing position, this bear call spread in October may be worth considering. It provides an attractive risk-reward profile that aligns with a potentially uncertain market outlook.
Originally Posted September 23, 22023 – Why This GOOG Bear Call Spread May Be Worth Looking At
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Disclosure: Options Trading
Options involve risk and are not suitable for all investors. Multiple leg strategies, including spreads, will incur multiple commission charges. For more information read the “Characteristics and Risks of Standardized Options” also known as the options disclosure document (ODD) or visit ibkr.com/occ