Alphabet Inc (NASDAQ:GOOGL) : Option Trading A Clever Short Put ImplementationDate Published: 2017-01-7
As we look at Alphabet Inc we note that a short put is one of the most common implementations of an option strategy, but the analysis completed when employing the short put often times lacks the necessary rigor especially surrounding earnings. This is a risky strategy, but there is a clever way to reduce risk.
With relative ease, we can go much further -- to identify the risks we want to take, and those that we don't in order to optimize our results. This is one of those cases.
There's actually a lot less 'luck' involved in successful option trading than many people realize. We'll get specific with short puts on GOOGL. Let's look at a three-year back-test of a short put strategy with these quick guidelines:
* We'll test monthly options (roll the trade every 30-days).
* We will avoid earnings.
* We will examine an out of the money put -- in this case, 30 delta.
* We will test this short put looking back at three-years of history.
What we want to impress upon you is how easy this is with the right tools. Just tap the appropriate settings.
Now we can peruse the results.
If we did this 30 delta short put in Alphabet Inc (NASDAQ:GOOGL) over the last three-years but always skipped earnings we get these findings:
Selling an uncovered put every 30-days in GOOGL has been a modest winner over the last three-years returning But there is a surprise we get when we examine short puts that were held during earnings. Let's turn to that piece, now.
GOING FURTHER WITH ALPHABET INC
Just doing our first step, which was to evaluate the short put while avoiding earnings is clever -- certainly an analysis that gets us ahead of most casual option traders. But let's take the analysis even further.
This time, we will do the exact same back-test, but we will only look at earnings. Specifically, we will short the put two-days before earnings, let earnings happen, then close the option position two-days after earnings.
Here are those results for the same 30 delta short put:
Selling an uncovered put in Alphabet Inc during earnings proved to be a winner, and more importantly, it returned more than the same short put that avoided earnings. While this clever use of earnings has outperformed the short put that avoided earnings, the question of risk is still in play. Having an option position during earnings is one of the riskiest implementations possible. The point is not that earnings were so strong -- there's a bigger picture here. Let's turn to that piece, now.
Moving through the analysis on Alphabet Inc (NASDAQ:GOOGL) has done more than show us returns, it has revealed that the concept of expertise in options has been made made overly complex. The point is simple: having the knowledge before placing a trade shapes the thought process about what to trade, when to trade it and even if the trade is worth it at all. Here's how all this works in real-life, beyond Alphabet Inc and short puts.