Alphabet is one of the big tech stocks set to report earnings later this week, and one trader is looking to capitalize on a move up for the tech titan.
Todd Gordon of TradingAnalysis.com believes that Alphabet "should be moving up towards $1,000" even after earnings, as he said Monday on CNBC's "Trading Nation." Gordon noted that Alphabet stock has traded in a "consolidation" pattern for the past three months, but the charts show that the stock looks to have broken out of upper range at around $820, signaling that Alphabet shares could keep rallying.
Gordon uses what he deems "support" at $820 to play Alphabet before the tech giant's earnings report on Thursday. But Gordon's bet largely depends on what he sees happening to Alphabet's implied volatility ahead of earnings.
According to Gordon, "into an uncertain event like earnings, implied volatility will increase because the expected movement is very high." What that means is that the price of options, both puts and calls, will be even more expensive as Alphabet looks toward Thursday earnings, and will fall following the event.
In that case, "rather than buying the expensive calls, we want to be selling the expensive puts," said Gordon. By shorting puts, Gordon predicts that he is set to make money in three different scenarios as implied volatility falls post-Alphabet earnings. Because Gordon is shorting puts, he can actually make money if Alphabet heads higher, if Alphabet trades sideways or if the stock drops but stays above $820 "support."
Gordon is selling the October 28 weekly 820/815 put spread, collecting $1.70. The trade has Gordon risking $330 to make $170, which is a skewed reward-to-risk ratio, but given that Gordon is shorting puts in the event that implied volatility drops post-Alphabet earnings, "there's three scenarios in which we can make money with this trade."
Alphabet shares have soared almost 23 percent since its Brexit lows in June and is up about 7.5 percent year to date.
