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Investing with options: Alphabet earnings
Koen Hoorelbeke
Investment and Options Strategist
Summary: This article will explore various options strategies in anticipation of Alphabet Inc.'s upcoming earnings report. We'll outline approaches for both bullish and bearish investors while comparing the risk and rewards to traditional stock buying.
Investing with options - Alphabet earnings
Alphabet Inc. is slated to release its Q3 2023 earnings report on October 24th. With a strong track record, including a revenue beat of $74.6 billion and EPS of $1.44 in its last quarter, market participants are keenly awaiting the outcome. Regardless of what the report reveals, options offer investors a myriad of ways to capitalize on the event.
Options strategies vs. conventional stock purchase
To understand the value propositions of using options, it's crucial to weigh them against simply buying the stock. With Alphabet's last traded price at $135.60, investing directly in shares is straightforward but offers less leverage and flexibility than options.
Important note: the strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it's crucial to make informed decisions.
1. Bullish outlook - buy call option:
Strategy: Buying a long-term call option
- Instrument: BuyToOpen 1 20-Sep-2024 Call 115 @ $32.75, delta of 0.79
- Premium: $32.75 (debit, per share)
- Premium and risk:
- Premium cost: $32.75 x 100 (per contract) = $3,275
- Max risk: $3,275 (if Alphabet is below 115 at expiry)
- Max reward: Significant (gains rise as Alphabet's stock price rises)
- Breakeven point: $115 (strike) + $32.75 (premium) = $147.75
- Why: A call option allows you to benefit from any upside in the stock with a fraction of the capital required to buy shares outright.
2. Bullish outlook - buy stock using ITM put option
Strategy: Selling an in-the-money put option
- Instrument: SellToOpen 1 27-Oct-2023 Put 140 @ $6.20, delta of -0.72
- Premium: $6.20 (per share)
- Premium and risk:
- Premium cost: $0 (you receive the premium)
- Max risk: $13,380 (if Alphabet falls to zero, adjusted by premium received)
- Max reward: $620 (if Alphabet is above 140 at expiry)
- Breakeven point: $140 (strike) - $6.20 (premium) = $133.80
- Why: This allows you to acquire shares at a discounted rate or pocket the premium if the stock stays above the strike price.
3. Bearish outlook - buy put option:
Strategy: Buying a long-term put option
- Instrument: BuyToOpen 1 20-Sep-2024 Put 155 @ $24.35, delta of -0.63
- Premium: $24.35 (debit, per share)
- Premium and risk:
- Premium cost: $24.35 x 100 (per contract) = $2,435
- Max risk: $2,435 (if Alphabet is above 155 at expiry)
- Max reward: Significant (gains rise as Alphabet's stock price falls)
- Breakeven point: $155 (strike) - $24.35 (premium) = $130.65
- Why: A put option offers the potential for profit if the stock declines, akin to short-selling but with limited risk.
4. Bearish/bullish outlook - covered call
Strategy: writing a covered call
- Instrument: SellToOpen 1 03-Nov-2023 Call 144 @ $1.41, delta of 0.20
- Premium: $1.41 (credit, per share)
- Premium and risk:
- Premium cost: $0 (you receive the premium)
- Max risk: Limited (potential loss of stock appreciation above 144)
- Max reward: $141 (if Alphabet stays below 144 at expiry)
- Breakeven point: Not applicable (already own the stock)
- Why: This strategy provides extra income while holding the stock.
- Yield:
- For the next 11 days, the yield is approximately 1.04% [(1.41/135.60)*100].
- Annualized, this comes out to about 34.64%.
Time decay consideration (theta decay)
The strategies recommended utilize options with a one-year expiry to mitigate the impact of time decay, or the rate at which an option loses value over time. Time decay accelerates as options near their expiration, making longer-dated options less susceptible to this erosion in value.
Risks and rewards
Options strategies come with their own sets of risks, from potential losses to the complexities of managing multiple positions. But they also offer a robust toolset for hedging and leveraging positions. Therefore, understanding your risk tolerance and employing appropriate strategies is essential.
Conclusion
Options offer a versatile array of strategies for capitalizing on Alphabet's upcoming earnings report. Whether bullish or bearish, there's an options play for every outlook. As always, it's crucial to weigh the risk and rewards before making a move.
Options are complex, high-risk products and require knowledge, investment experience and, in many applications, high risk acceptance. We recommend that before you invest in options, you inform yourself well about the operation and risks. In Saxo Bank's Terms of Use you will find more information on this in the Important Information Options, Futures, Margin and Deficit Procedure. You can also consult the Essential Information Document of the option you want to invest in on Saxo Bank's website.
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