Options

Time to Short Alphabet Stock as It Nears a Trillion Dollar Market Cap

Shares of Alphabet (NASDAQ:) continue to make new all-time highs on a daily basis. GOOG is up over 40% over the past six months after bottoming out last June. It is up nearly 100 points (over 7%) just this year alone.

Alphabet is on the doorstep of joining the trillion dollar market cap club along with Apple (NASDAQ:) and Microsoft (NASDAQ:).

This red hot rally is starting to look a little too rambunctious. Time for Alphabet stock to cool off in the coming weeks.

Google Stock Chart

GOOG stock is getting decidedly more expensive form a valuation perspective. Alphabet now sports a current P/E over 30 and is nearing the richest multiple in the past year. The last time P/E exceeded 30 was last April, which marked a significant top in GOOG stock.

At some point valuations will matter, even in this momentum driven melt up. The reversal could be sudden and swift given the magnitude of the rally.

Alphabet is looking extremely overbought and over-loved on a technical basis. 14-day RSI is above 75 which has signaled short term tops in the past. MACD is nearing an extreme which has been a bearish indication. Bollinger Percent B is well above 100, yet another sign of overexuberance. GOOG stock is trading at a huge premium to the 100-day moving average which has been a prelude to a pullback previously.

Chief Justice Potter Stewart famously said “I know it when I see it” to categorize obscenity. In a similar fashion, once can simply look at the GOOG chart and see that Alphabet stock is starting to look more than a little frothy at current levels.

No one can predict how far momentum can drive a stock. The eventual outcome, however, is usually very predictable. Look for GOOG stock to come down hard once the momentum breaks and the mania subsides.

with expectations for $12.77 in earnings on $38.45 billion in revenue. This is the same number the company reported a year ago if earnings match expectations. This means Alphabet will see no appreciable year over year earnings growth, yet the stock is higher by 42% in that time frame.

Last quarter saw a big miss on earnings for GOOG. Expectations were for $12.57 while actual reported earnings came in at just $10.12 — a nearly 20% miss. Yet the market has shrugged it off. Interesting to note that GOOG has struggled to head higher in the weeks after the previous four earnings reports. Expect the same this quarter as well given the rich valuations.

Trading GOOG Stock

Stock traders should look to short Alphabet stock on any further strength. A pullback to the $1,340 level would be the initial downside profit target. A meaningful breakout past $1,500 would serve as a prudent stop out point to mirror the profit objective.

Option traders may want to consider selling the Jan. 31 $1,480/$1,490 call spread for $1.50 net credit. Maximum gain on the trade is $150 per spread with maximum risk of $850 per spread. Return on risk is 17.64%. The short $1,480 strike price provides a 3.5% upside cushion to the $1,429.73 closing price for GOOG. The trade expires before earnings in early February and thus avoids any earnings-related risk.

As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the  can email Tim at timbiggam@gmail.com. 

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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