[Options] Are the Megacaps Back?

Sean McLaughlin
January 20, 2021

Chatting with the team this morning, something that stuck out and we all agreed on is that the Megacaps are starting to show signs of re-asserting their dominance. And that it won't be a one-day event. Just look at NFLX, MSFT, AAPL, and the like and you'll likely see what we're seeing.

And the stock that stands out the most to us right now is Google $GOOG.

Check out this chart:

Today, GOOG has traded above the resistance you see on this chart, trading as high as $1885.

A megacap making new all time highs after a two month consolidation in a bull market? Yes please!

The challenging thing from a risk management point of view is that the absolute share price of $GOOG is so high. As I type this, GOOG is trading around $1870 per share. Pricey! The nice thing about options is that we can dramatically lower our costs in participating in a bullish play, but it still won't be cheap if we want to have any reasonable shot at success.

With that in mind, I'm looking at a bullish spread to give us a seat in the theater for the show.

Here's the Play:

I like a $GOOG October 2000/2100 Bull Call Spread for approximately $33.00-$35.00 here. This would mean I'll be long the 2000 calls and short an equal amount of 2100 calls for a net debit which represents the most I can lose in the trade.

Of course, that's a lot of $$ to potentially lose even on a 1-lot trade. So I'll be keeping a tight leash on this trade. Here's how:

  • If $GOOG trades below $1700/share at any time during my hold, I'll close the trade down to salvage whatever is left in the value of the spread.
  • If the value of the spread gets below $20.00, then I'll close the trade down. $15 is plenty of money to risk on a spread of this size. I don't want to lose much more than that if I can help it.

While both of these risk management items can help me minimize the potential loss, I'll be mindful that if shit hits the fan, I'm still on the hook for a 100% loss in this spread. So I'll be very careful to size this trade such that a loss of this magnitude won't have any meaningful negative impact on my trading capital. There's no shame in trading 1-lots here!

On the upside, if/when $GOOG goes our way, I'll be looking to close this spread around a $66.00-$70.00 credit. This would represent capturing 50% of the maximum potential gain, without having to hold on to the trade all the way to October expiration. If we get to our profit target next week? Fine. I'm out. I don't care when we get there, but when we do, I'll exit the trade with my winnings.

If you have any questions on this trade, please send them here.

~ @chicagosean

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