Exploring Alphabet Inc.’s Stock Options
For those considering Alphabet Inc. (GOOGL), shorting out-of-the-money (OTM) put options could provide some interesting opportunities. With a premium of 1.77%, it may be worth exploring this strategy. Additionally, there’s potential for GOOGL stock to rise by about 32% based on free cash flow (FCF) targets. On the other hand, purchasing in-the-money (ITM) calls might offer a different risk-reward scenario.
As of December 12, GOOGL closed at $309.29, which is just shy of its recent peak of $323.44. But, I believe it could reach as high as $408.27 in the coming year.
This article will dig into how you can leverage OTM puts and ITM calls to aim for a stronger GOOGL stock performance while managing risk.
Previously, we mentioned shorting a $275.00 strike price put option, which was expected to expire on November 11. Our analysis indicated that GOOGL stock was undervalued, as it closed above $275.00, resulting in a successful short position. By that time, GOOGL had climbed to $289.58, representing an increase of 6.8% over the previous month, which is a solid return compared to the OTM put’s yield.
With this context, why not channel the proceeds from shorting OTM puts into participating in GOOGL’s upside via ITM calls? Let’s take a closer look at the stock’s upper price target.
GOOGL Price Target
In earlier discussions, we indicated that GOOGL could be valued at over $408 within the next year, given Alphabet’s robust free cash flow margins. In the last quarter, the FCF margin increased to 23.9%, up from 19.98% a year earlier.
If Alphabet maintains its FCF growth at around 22%, it could generate an estimated $100 billion in FCF by 2026. However, to be conservative, let’s assume a slightly lower figure of $90 billion. Based on a 50x multiple of FCF, that would place GOOGL’s worth between $4.5 trillion and $5 trillion over the next year.
Currently, Alphabet’s market cap sits at approximately $3,746 billion. This suggests that the company could see a valuation increase of about $1 trillion, equating to a 26.8% rise in share price. Calculating this gives us a revised target of $392.18 per share. In an optimistic scenario, the peak price could reach around $412.90.
Overall, investors might expect a price target averaging over $400, hovering around $402.54. Interestingly, among 33 analysts, the average price target they’ve set is about $343.47. It seems that GOOGL is currently not reflecting its true value.
Short Selling an OTM Put
One effective approach could be to short OTM puts with short expiration dates. For instance, a put option set to expire on January 16, 2026, at a $295.00 strike price offers a premium of $5.23. This put option, which is about 4.62% below the recent closing price, can yield a return of 1.77% to short sellers.
This means that by securing $29,500 with a brokerage, an immediate earning of $523 could be realized, assuming GOOGL stays above $295. If all goes well, you can then utilize these proceeds to buy ITM calls for future expiration dates, thereby gaining leveraged exposure without excessive risk.
Purchasing ITM GOOGL Calls
Consider a $295.00 call option set to expire on July 17, 2026, which carries a median premium of $44.93. It’s worth noting that this strike price is already $14.29 in-the-money. This could offer some protection in case GOOGL’s stock flattens or goes down.
If an investor effectively repeats this OTM short put strategy over the next several months, they could potentially earn upwards of $36.61, which could significantly offset the call option’s cost.
To summarize, if GOOGL rises to, say, $370 within seven months, the intrinsic value of the $295.00 call would be $75.00, leading to an impressive net profit. On the flip side, if GOOGL remains flat at around $310, the intrinsic value of the option would decrease, but the losses would be minimized due to the income generated from the OTM puts.
This potential interaction suggests that shorting OTM GOOGL puts while buying ITM calls could be a sound strategy for navigating the market.
