Catch the falling knife of GOOG?
Hey friends — Joe here.
📊 Trades on the Table lands every Saturday. One real position, why I opened it, and what had to be true.
Nothing here is advice. Just what's on my screen and how I think about it.
Alphabet fell 12.6% on Thursday after Q3 earnings, from US$321.89 to US$282.32.
META lost about 12% in the five sessions after its report. AMZN dropped about 6% pre-market on Friday. The fear of an AI bubble bursting is high, and friends keep asking me: is this the time to catch the falling knife of GOOG?
GOOG is still a major part of my portfolio. If you've collected RSUs over the years, yours may look the same.
My personal context
In July, I hedged 40% of my GOOG with puts: US$345 strike, expiring 18 December.
A put is the right to sell at the strike, however far the stock falls.
Which means for 40% of my GOOG positions, I have the option to sell these shares at $345.
On Thursday I exercised a small portion of my right to sell these shares at $345.
The rest of the puts are still open, with the same US$345 floor until 18 December.
What I missed
GOOG lost almost 7% in the week before earnings, and the trend was more bearish than bullish.
I added no net new long position, but I didn't expect a fall this drastic, and it never occurred to me to hedge more of my positions.
My game plan today
- Cash out the remaining protection the same way. Sell the puts, sell the matching shares. That's cash to redeploy once the stock finds support.
- Fair value: US$295 to US$300, my own estimate. The business is still growing: revenue up 25%, Google Cloud doubled. What's scaring investors is US$51.4 billion of quarterly capex, which took free cash flow to about -US$9.1 billion. My fair value is only an estimate too. If AI spending keeps eating the cash flow, that number is wrong.
- Don't buy yet. The stock already closed below my number, but in a sharp downtrend it can fall further. I want to see it stabilise and start to recover.
- Split the cash into three. Sell puts around US$250, about 11% below Thursday's close. I don't mind buying shares back there. If the fall continues, a second tranche at US$220 to US$230. The third tranche goes in when the price and trend stabilise.
- If it stabilises above US$250, buy shares directly, and maybe LEAP calls to add to the recovery.
None of these orders is placed yet.
Three lessons
1. Capital preservation decides whether you can keep playing. If one asset is a high share of your portfolio, consider hedging. I should have hedged more last week, and I was lucky to have 40% covered. (Still at the company? Check your trading policy first. Many employers ban staff from hedging company stock. If so, you can use other related instruments to hedge, such as QQQ.)
2. Don't catch falling knives. A low can go lower, so wait for confirmation of a reversal. Moving averages show which stage you're in: GOOG closed about 17% below its 50-day and 200-day, and the 50-day slipped under the 200-day on Monday.
Fundamentals decide what. Technicals decide when.
3. Anything is possible in this market. A high-quality business can lose 12% in a day. A cash reserve means your hands aren't tied when it happens.
How much of your portfolio sits in one stock, and what would you do if it fell 12% tomorrow? Hit reply and tell me. I read every one.
Keep growing!
Joe
This is a description of trades I personally made and plan to make — not investment advice, and not a recommendation to buy or sell anything. Buying puts can lose the whole premium. Selling puts carries real risk, including being obligated to buy the stock at the strike if it falls further. LEAP calls can lose their full cost. Options aren't suitable for everyone. Fair value is my own estimate and may be wrong. Option figures are as recorded in my broker account, in US dollars. Share prices are as at the US close on Thursday 29 October and will have moved since.
The Income Stack runs three times a week — 💡 One Idea on Tuesday, 🛠️ The Solopreneur Stack on Thursday, 📊 Trades on Saturday.