Easy as ABC: How To Trade Alphabet (GOOG) Using Options

  • Alphabet is a strong contender in the tech space, with several growth opportunities available to them
  • They are rapidly expanding their artificial intelligence and cloud platforms, while maintaining focus on their core competency, the search engine.
  • They have strong financials, with positive cash flows and continued revenue growth
  • They are an expensive stock to trade, but there are ways to implement bullish strategies using options to avoid high capital costs

Let Me Google That For You

Alphabet (GOOG) is a staple in the tech industry, and they are constantly engaging in acquisitions and various growth opportunities. Their position isn’t going to be knocked away anytime soon, as they have exposure to almost every new development in the space, ranging from artificial intelligence to self-driving cars.

However, the digital world continues to evolve, and it is increasingly important that Alphabet stays on top of the trends. Search and ad revenue remain key drivers for the company, but other mediums for search, such as voice assistants like Amazon’s Alexa, pose a big risk.

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Smart Money: The Poor Man’s Covered Call

In my most recent blog post, I talked about shorting/selling a call, aka a covered call. This technique is used as a way to reduce cost basis against shares held, and can also be used as an income generation technique for larger accounts.

However, not everyone has a large account (I definitely don’t). So what are some alternatives to going long on 100 shares and selling a call against it?

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The Profit of a Trade: How I made $1,700 in 12 days By Selling A Call Vertical (Paper Trading)

IBM is doing exactly what I wanted to.

You can read about my bearish play on the stock in my most recent blog post here. As of March 24th, I’ve made $1,728 on the 10 contracts I placed 12 days ago in my paper trading account. When I placed the trade on March 12th, the stock price was at $160.83. Since then it’s dropped down to $148, and my probability of profit has increased to 89%.

IBM’s volatility also increased to 100, which means that the stock is extremely volatile right now – which gives me more opportunity to be right in the trade.

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The Inverse Skew on Gold

Implied volatility is the measure of the volatility of the price of a security. It increases when the market is bearish (when things are going down) and decreases when the market is bullish.

When things are going better (up market) people are less nervous (down volatility). But when there is tumultuous economy, the VIX will spike in response to the fear of the consumer.

The VIX is sitting around 10.13 right now, which is only pennies higher than the yearly low of 9.37. We can look at this number and postulate that there isn’t a lot of fear in the marketplace right now.

We can also look at gold and see the positive correlation to implied volatility. When IV moves up, Gold moves up.

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Duration TRUMPS Direction

Duration is an interesting variable to play around with.

In bonds, the longer the duration, the more risky the bond is (thus the more it pays). In stocks, most people tend to just buy and hold, so duration can either be very good (the stock increases over time) or very bad (the stock decreases over time).

In options, we like to sell premium, which utilizes time decay. However, if we enter a trade too early (a mistake I have made before) we sometimes don’t have enough time to be right.

It’s the worst thing in the world to have your trade expire a few days before the underlying finally starts doing what you wanted it to do originally.

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Buying Power Reduction and the Risk-Return Tradeoff

As a small-account trader, there’s a lot of different things that I have to pay attention to when I place a trade. I’ve mentioned many of the different variables before (Greeks, IV, etc.), but ANOTHER one is the buying power reduction.

Buying power is the total capital available in our account. Buying power reduction is the amount of capital it takes to place a trade (aka the margin required).

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Yo Gamma Gamma

Gamma is yet another Greek, one that we don’t examine quite as closely as the others, but it is still important. Gamma represents the direction and speed in which delta will change per a $1 move in the price of the underlying stock.

In calculus terms, gamma is the first derivative of delta. It is the second derivative to the underlying’s price.

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