How to Trade Alphabet Stock Options
Choose the Broker that offers stock option chains. The Broker has to allow you to buy and sell options. This step is vital; only some brokers enable options trading, and if you open an account with a Broker that you end up unsatisfied with, it will be problematic. Pick the right Broker straight from scratch.
Open a Trading Account with the Broker. Most Brokers will ask you to upload an ID and proof of residence to verify your identity.
Deposit Funds to the Newly Opened Trading Account. Funding alternatives range from credit cards to bank transfers and e-wallets; it will depend on each trading platform. Trading Accounts are usually available in US Dollars (USD), Euros (EUR), Pound Sterling (GBP), Swiss Franc (CHF), and Australian Dollar (AUD) as the base currency.
Set your investment goals. Are you going long or short? Will you buy calls, sell longs, buy puts or sell puts? In the end, are you bullish or bearish, and how will you place your trade based on that?
Buy the chosen asset and Apply your Investment Strategy. Once the Broker confirms that your account is funded and ready to trade, it's time to buy the asset and apply your trading strategy.
Review your performance and calibrate the strategy as needed. You can't expect to get it right from the beginning. When investing, especially while you are starting, you will make mistakes. That's a given. Learn from your errors, improve and twitch your strategy as needed.
However, before you proceed, you must take into account that:
Past performance doesn't mean future returns. You will hear stories about that "Trader that made a fortune". Refrain from assuming an investment will continue to do well in the future simply because it's done well in the past.
Only invest what you can afford to lose. Make sure to keep your bank balance positive. There is no assurance that it will go well.
Do not blindly trust what you read online. People are biased, and even the top financial gurus make mistakes. Learn, investigate and reach your conclusions. Reading financial media will aid you in taking more educated decisions, but do not take it as proven truth.
Stay Calm. Financial market volatility can be scary, and it is easier to say than to do, but remember that it is hard to take good decisions while anxious. If you get too nervous about your investments, invest a smaller amount of money.
How to Read Alphabet's Options
Let's start with the facts you need to know, starting with the most basic one: How do you read the name of an option?
For example, an Alphabet stock Call option symbol looks like this: GOOGFEB25120C. Now let's dismantle it into sections; this pattern is applied not only to Alphabet's options but to every stock option:
GOOG: Alphabet's stock trading symbol in the Nasdaq exchange.
FEB25: The expiry date of the call, in this case, is February 2025.
120C: This means it's a call option, and the strike price is 120; if it had a 'P', it would be a Put.
Call Options and Put Options
Call Options and Put Options are derivatives that derive value from an underlying asset, typically stocks. When trading options, an investor has the right but not the obligation to buy or sell the underlying stock at a predetermined price, known as the "strike price," before a set expiration date.
There are two types of options:
Call options: A call option gives the buyer the right to buy the stock at the strike price.
Put options: A put option gives the buyer the right to sell the stock at the strike price.
Examples of how Call and Put Options work
Calls are an option that gives the right to buy the underlying stock at the strike price. For example, if an investor buys a call option on Alphabet stock with a strike price of $120 and an expiration date of three months, they have the right to buy Alphabet stock at $120 for the next three months. If Alphabet's stock price increases to $150 by the expiration date, the call option buyer can exercise their right to buy the stock at $120 and then sell it for $150, resulting in a profit.
Puts, on the other hand, give the right to sell the underlying stock at the strike price. For example, if an investor buys a put option on Alphabet stock with a strike price of $120 and an expiration date of three months, they have the right to sell Alphabet stock at $120 for the next three months. If Alphabet's stock price decreases to $100 by the expiration date, the buyer of the put option can exercise their right to sell the stock at $120, resulting in a profit.
What are Alphabet Options used for in an Investment Portfolio?
Trading Alphabet stock options can be a highly speculative strategy, but it could also be used as hedging, depending on the investor's goals and risk tolerance.
For speculative traders, options can offer the opportunity to profit from the movement of the underlying stock price without buying the stock outright. Likewise, hedgers use stock options to reduce the risk of holding a stock position.
However, it is essential to thoroughly understand the mechanics and risks of options trading before getting involved. Options are often considered a more advanced and complex investment than traditional stock trading. The main risk of options trading is that the acquired options may expire worthless if the underlying stock price does not move in the desired direction.
Options Trading Alternatives
The primary difference between buying a call option and selling a put option is the type of risk an investor is willing to take on and the potential profit or loss outcome.
There are substantial differences between buying calls and puts and selling them. For example, suppose you are bullish (you believe the price will increase) on Alphabet's stock. When buying a call option, an investor is taking on the risk that the underlying stock price will increase and is hoping to profit from a rise in the stock price. If the stock price does increase, the buyer of the call option can exercise their right to buy the stock at the predetermined strike price (lower than the market price) and sell it for a profit.
On the other hand, if the stock price does not increase, the call option will expire worthless, and the investor will lose the premium paid for the option.
When selling a put option, an investor is taking on the opposite risk, or the obligation, to buy the underlying stock at the strike price if the stock price decreases. This strategy is "writing" or "selling" a put option. If the stock price remains above the strike price, the put option will expire worthless, and the seller of the put option will keep the premium received. However, if the stock price decreases and falls below the strike price, the put option buyer may exercise their right to sell the stock to the put option seller at the predetermined strike price.
In the previous case, the put option seller will be obligated to buy the stock and suffer a loss equal to the difference between the stock price and the strike price plus the premium received.
Decisions to make when trading Alphabet Options
Bullish or Bearish? In summary, then, there are four main alternatives when trading stock options, and these are:
Buying Calls: Bullish
Selling Calls: Bearish
Buying Puts: Bearish
Selling Puts: Bullish
So the first decision relates to your belief that Alphabet stock will go up and down. However, there are other decisions you have to make as opposed to stock trading. For example, you must also decide on the option's expiration date (when it will become either worthless or profitable) and the strike price to predict the price differential versus the actual market price. In summary, three main variables to take into account:
Is the stock price going to rise or decrease?
Is it going to rise/decrease at the chosen expiration date?
Is it going to rise/decrease at the chosen expiration date, and what price will it have?
As you can see, it's an incremental decision-making process.
Now let's dive into the Greeks, the main options analysis tools.
Options trading is one of the most complex financial operations.
The "Greeks" are a set of metrics used in options trading to measure the sensitivity of the price of an option to various factors such as the underlying stock price, time to expiration, volatility, and interest rates. The Greeks aid traders in understanding and managing the risk associated with their options strategies.
The following are the famous options trading 'Greeks':
Delta: measures the rate of change of an option's price concerning changes in the underlying stock price. Delta ranges from 0 to 1 for call options and 0 to -1 for put options. If the price of Alphabet stock has been increasing, the delta of a call option on Alphabet stock will be closer to 1, indicating that a slight change in the stock price will result in a significant change in the option price.
Gamma: measures the rate of change of an option's delta concerning changes in the underlying stock price. If the price of Alphabet stock has been volatile, the gamma of the options on Alphabet stock will be higher, suggesting that the option's delta will change rapidly with shifts in the stock price.
Theta: measures the rate of change of an option's price to the passage of time. Theta represents the time decay of an option, meaning the value of the option decreases as the expiration date approaches. Suppose the option's expiration date is close and the price of Alphabet stock has not moved significantly. In that case, the option's theta will be higher, indicating that the option will rapidly lose value as time passes due to the time decay factor.
Vega: measures the sensitivity of an option's price to changes in volatility. Suppose the implied volatility of Alphabet stock has increased. In that case, the vega of the options on Alphabet stock will be higher, indicating that the option price is more sensitive to changes in volatility.
Rho: measures an option's price sensitivity to changes in interest rates. So, the price movements of Alphabet stock do not directly affect rho, as rho is primarily affected by changes in the interest rate environment.
By considering the Greeks, options traders can make more informed judgments about their trades, such as when to enter or exit a position and how to manage their risk.
For example, if an options trader is bullish on a stock and buys a call option, they may want to monitor the delta of the option to see how much the option's price changes in response to stock price changes. Additionally, if the options trader is concerned about the option's time decay, they may monitor the theta to see how much the option's price is declining due to the passage of time.
It is important to note that the Greeks are not absolutes and depend on the current market conditions, including the stock price, volatility, and time to expiration. Additionally, the Greeks are interrelated, so changes in one Greek will often impact the other. As a result, options traders need to consider the overall picture and not just one Greek when making trading decisions.
Hedging Strategies when owning Alphabet Stock
Hedging with options is a common strategy used to reduce the risk of an investment portfolio. Here are a few of the most common hedging strategies used with options:
Protective Put: This strategy involves purchasing a put option on a stock the investor already owns. If the stock price falls, the put option provides the investor with the right to sell the stock at the strike price, which can limit their potential losses.
Covered Call: This strategy involves simultaneously holding a long position in a stock and writing (selling) a call option on that same stock. If the stock price rises, the call option will be exercised, and the investor will be obligated to sell the stock at the strike price, but they will also benefit from the increase in the stock price.
Collar: This strategy involves holding a long position in a stock, purchasing a protective put, and writing a covered call on that stock. This strategy can provide the investor with downside protection and some potential upside while limiting potential losses and gains.
Straddle: This strategy involves purchasing both a call option and a put option on the same underlying stock with the same strike price and expiration date. This strategy can provide the investor with potential profits in either direction of the stock price movement, but it also requires a more considerable investment and can be expensive.
It's important to note that these strategies can be complex and involve significant risk, so it's recommended that options traders seek the advice of a financial advisor or professional before implementing any hedging strategy. Additionally, options traders should continually monitor the values of their options positions and the underlying stock and adjust their strategy to stay within their risk tolerance and investment goals.
Costs involved in Options Trading
Commission: Options traders will typically pay a commission to their Broker for each trade they make. This commission can be a flat fee per trade or a percentage of the trade value and varies among brokers.
Bid-Ask Spread: Options have a bid price and an asking price, similar to stocks. The difference between both prices is called the bid-ask spread, and options traders will pay the asking price when they buy an option and receive the bid price when they sell an option. The bid-ask spread can impact the overall cost of the trade and should be considered when making trading decisions.
Premium: The premium is the price of the option itself and is the price that the options trader pays when they buy an option and receives when they sell an option. Several factors impact the premium's price, including the underlying stock's market price, the time to expiration, and the stock's implied volatility.
Exercise and Assignment Fees: If an options trader holds an option until expiration and it is in the money, they may choose to exercise it. In this case, they will typically pay an exercise fee to their Broker. If the trader holds the option buyer exercises a short option position, and the option, the trader will be assigned an equivalent stock position and may pay an assignment fee to their Broker.
Financing Costs: Options traders who hold positions overnight may be subject to financing costs, which are the costs of borrowing the underlying stock or cash used to pay for the option premium. These costs are typically based on the overnight interest rate and can vary among brokers.
Risks Involved in Options Trading
There are several risks that options traders should be aware of, including:
Market Risk: The underlying stock price can fluctuate, and options traders may experience losses if the stock price moves in an unexpected direction.
Volatility Risk: Options prices are impacted by changes in the underlying stock's volatility. If the stock becomes more volatile, the options price can increase, and the options trader may experience losses.
Time Decay Risk: Options have a limited lifespan, known as the expiration date. As the expiration date approaches, the option's value can decline intrinsically, known as time decay. This can result in losses for the options trader if they hold the option until expiration.
Liquidity Risk: Options are less liquid than stocks. It may be difficult for traders to buy or sell options at the desired price, particularly during periods of high market volatility.
Credit Risk: If the options trader is holding a short option position, they may be at risk of default by the option buyer. This can result in losses for the trader if the option buyer fails to meet their obligations.
Margin Risk: Options traders may be required to post collateral, such as cash or stocks, to cover the potential losses from their options standings. If the value of the collateral falls, the options trader may be subject to a margin call, where they are required to add additional collateral to cover their losses.
Remember about Alphabet Inc!
Trading Alphabet Option still represents what will happen with the company. So, you have to predict what will happen with the company in the future based on facts. When considering investing in Alphabet's stock options, here are a few things to take into account:
Financial Performance: Look at Alphabet's financial statements and consider factors such as revenue, earnings, and cash flow to gauge the company's overall financial health.
Market Dominance: Alphabet is dominant in search engine and advertising markets. Consider the company's market position and how it may grow, with a particular remark on the regulator's scrutiny of antitrust behaviour.
Product Portfolio: Alphabet offers a wide range of products and services, including search, advertising, cloud computing, YouTube, and more. Consider the company's product roadmap and the growth potential of each product line.
Market Competition: Alphabet faces competition from other technology companies, including rivals such as Apple and Amazon. Consider the competitive landscape and how it may impact Alphabet's growth prospects.
Technological Advancements: Alphabet is known for its innovative products and technology. Consider the company's technology roadmap and how it will continue to differentiate itself.
Company Leadership: The performance of a company is often closely tied to its leadership. Consider Alphabet's CEO, Sundar Pichai, and his track record and plans for the company.
Market Sentiment: It's essential also to consider how the market views Alphabet, including analyst ratings, investor sentiment, and media coverage.
Conclusion on Options Trading
In conclusion, options trading can be a powerful tool for investors looking to enhance their portfolios and generate additional income. Options provide the flexibility to profit from bullish and bearish market conditions, and traders can use various strategies to manage risk and maximise returns.
However, options trading also involves a significant amount of risk, and traders must have a thorough understanding of the risks involved and the mechanics of options trading before they enter into any options positions. This includes a solid understanding of the Greeks, the factors that affect options prices, and the different strategies that can be used in options trading.
Options traders must also have a well-defined investment strategy and risk management plan. They should continually monitor their options positions and adjust their strategy as market conditions change. Traders who are new to options trading are encouraged to start with more minor positions and to seek the guidance of a professional financial advisor before entering into any options trades.
Alphabet options are popular financial derivatives among traders seeking exposure to Alphabet's share price movements. Through options (a financial derivative), you may trade Alphabet stock at a set price (known as the strike price) before a predetermined date (known as the expiry). There are two Alphabet options to trade: calls and puts. This article explains in detail how to trade Alphabet options and what they are.