Alphabet Soup – $GOOGL Hedge and Stock Alt Review

by CC April 22, 2016 2:55 pm • Commentary• Trade Ideas

The company formerly known as Google reported Q1 earnings last night after the bell, disappointing investors on earnings and revenue:

The Google parent company said it saw adjusted first-quarter earnings of $7.50 per share on $20.26 billion in revenue. Analysts expected Alphabet to report earnings of about $7.97 a share on $20.37 billion in revenue, according to a consensus estimate from Thomson Reuters.

The lower-than-expected quarterly results were potentially due to Alphabet’s “other income” line, which was hurt by losses in foreign currency exchange and equity investments. Those figures came in lower than some analyst models predicted.

Yesterday into the event we detailed a couple of ways to define risk into the event, for those already long shares or for those that wanted to play for new highs without taking the risk of a decline like we saw. I want to go over those trades because these tactics are very important in the current market.

First, we looked at a hedge vs long shares. Here was the trade idea:  

But what if you’re already long GOOGL, think it has the potential for new highs but just can’t stomach a large move lower on earnings. That means your stock is a great candidate for protection.

Hedge vs 100 shares of GOOGL (780) Buy the April22nd weekly 760/710 (put spread) April22nd 825 (call) put spread collar call for 7.00 debit

This was a very cost effective hedge as it only cost $7 and is now worth $22 saving $15 dollars on the move lower and lessening the blow. The stock was even lower after hours and with protection down to 710, if you were long stock going in to earnings, this was a nice hedge to help you go to sleep last night. If you did this hedge the best thing to do now is to trade out of the long 760 put before the close, locking in the savings of the decline and lowering your cost basis in your long stock in the process.

The second trade is similar in that it was a way to protect yourself into an uncertain event as both a stock replacement or for those looking to get involved in GOOGL but with defined risk. Here was the trade:

For those looking to replace their stock or want to own Google for move to the previous highs but don’t want to leave themselves open for a big reversal from this spot near the highs, stock alternatives make sense:

In lieu of 100 shares of GOOGL ($780) Buy the April22nd weekly 775/825/875 call fly for $15

With the stock down $42 this is obviously worthless, but it only was $15 in risk, so as a stock replacement it saved $27 vs having been long stock. It can be left to expire worthless and the stock can be bought back for those that want to be longer term holders. Again, that lowers the cost basis of your holding by the $27 saved.

Of course, these trades weren’t risk-less. The hedge could have been worthless with the stock unchanged or higher and of course the stock alternative could have been worthless with the stock at 775 or (worse) above 875. But that’s where implied moves can help inform our trading around events. Again, going back to the stock today, it is down $42, and here is what we said yesterday in our preview:

The options market is implying about a 5.5% one day move, or about $42 in either direction,

Knowing what the options market is implying can help inform strikes and options can be used to nullify some of the asymmetrical risk of owning a stock into an otherwise uncertain event.