Smart Investor - Make your Alphabet (GOOGL) investment work harder with options

For investors who are moderately bullish but looking to generate additional yield, options strategies present an opportunity. One such approach is the covered strangle, which can provide extra cash flow while maintaining exposure to potential upside.

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.

The covered strangle: Enhancing yield on GOOGL

The covered strangle is a combination of a covered call and a short put. This strategy works well for investors who already own GOOGL shares and want to generate premium income while being open to acquiring more shares at a discount.

Structure of the trade:

• Sell the 210 call (March 21, 2025 expiry) → This generates premium income but caps upside if GOOGL rallies above $210.
• Sell the 175 put (March 21, 2025 expiry) → This earns additional premium but obligates the investor to buy GOOGL at $175 if the stock declines.
• Total premium received: $3.40 per share (~2% yield in less than 40 days)

Key benefits and risks:

• Generates extra cash flow while waiting for a price move.
• If GOOGL stays between $175 and $210, the investor keeps the full $3.40 premium.
• If GOOGL drops below $175 at expiry, the investor effectively buys more shares at $171.60 (strike minus premium), assuming additional downside risk.
• If GOOGL rises above $210 at expiry, the investor sells shares at a higher price, securing gains but limiting further upside.

Why now? Elevated implied volatility

GOOGL's implied volatility (IV) currently sits at 26.92%, with an IV rank of 33.12%. This suggests that options premiums remain relatively elevated, making premium-selling strategies attractive. By utilizing a covered strangle, investors can capitalize on this elevated IV to enhance their returns while managing risk exposure.

Alternative strategies for bullish & bearish investors

For investors considering other approaches, two additional strategies provide different risk-reward profiles:

1. Bullish: Buy a LEAP call – Purchasing a long-term call option (e.g., expiring in 2026) allows investors to maintain upside exposure with limited risk while avoiding the need to own shares outright.

2. Bearish: Buy a put – Acquiring a put option with an expiration far enough in the future provides downside protection or a speculative bearish bet on GOOGL’s price decline.

Conclusion: Yield enhancement while staying invested

The covered strangle provides an attractive opportunity for investors looking to generate additional yield while maintaining exposure to Alphabet. If GOOGL remains within a reasonable range, investors stand to collect the full premium, adding to their returns. If the stock moves significantly, they either take profits at a higher price or acquire additional shares at a discount—both favorable outcomes for long-term investors.

For those already holding GOOGL, this strategy offers a practical way to enhance returns in a neutral to slightly bullish market environment while managing potential risks effectively.