A strong earnings season continues. Little talk of rising interest rates, tariffs, trade wars, or an economic slowdown. Last night, Alphabet (GOOG) (GOOGL) , the parent of Google, continued the strong trend of reports. The company crushed estimates delivering earnings of $11.75 per share against a $9.59 estimate. Revenue of $32.66 billion also exceeded expectations of $32.19 billion, growth of 23.7% year over year in terms of constant currency.
Given only the slight beat on revenue versus the huge bottom line number, it is clear margins greatly improved in the second quarter. The Traffic Acquisition Costs (TAC) dipped to 47% from 61% in the quarter, a huge boon for Google. The company is pouring money into the cloud, self-driving automobiles, hardware, healthcare, and internet video. YouTube actually provided a major boost for Alphabet this quarter and I expect that to continue. Over time, we should see a larger push into e-Sports and streaming as YouTube seeks to close the gap against Amazon's AMZN Twitch.
Not everything is perfect, though. Desktop bolstered search numbers. With the move into the mobile world, the concern here is whether that is sustainable. History of a continued move for Alphabet is split. It's been a coin toss the last two years; however, a close higher Tuesday does favor the bulls.
One piece of the puzzle that doesn't favor the bulls is the technical picture. Let's take a look at GOOG, Alphabet's Class C shares.
Shares of GOOG are breaking out higher Tuesday, which is normally when momentum traders buy. The issue is they is trading above the top end of the Bollinger band. That has signaled a temporary top for the past year.
At the very least, shares have moved sideways like we saw in November 2017, but we've also experienced some decent pullbacks. I feel like that sets things up for a combination play to the downside. With the implied volatility collapsing Tuesday, a trader can get long some option premium at a relatively attractive price.
While I don't think we are looking at a ton of downside, I could see the shares giving back 3 to 6% from this point before powering higher, so that's how I'd attack this one. I believe GOOG will find support no lower than $1,175, so that's my target with this unbalanced butterfly.
-- Buy to open 1 GOOG August 17 $1,220 put
-- Sell to open 3 GOOG August 17 $1,185 puts
-- Buy to open 2 GOOG August 17 $1,160 puts
Net Cost: $260 (currently)
Max Risk: $1,760 on the downside, $260 if Alphabet does not trade below $1,220
Max Reward: $3,240
Breakeven Minimum: $1,217.40
Days Until Expiration: 24
I would consider a partial exit of this trade if the value reached $8. If a trader only has one combination, then they will have to decide based on their risk tolerance whether to close the trade or keep it open.
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