Google Stock Price Too Expensive for You? Try Options

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Google Stock Price Too Expensive for You? Try Options

Generally, investing in a stock entails paying the share price multiplied by the number of shares purchased. As of February 2022, 100 shares of Google (GOOG), now Alphabet Inc., would cost roughly a quarter-million dollars (100 * $2,500 per share).

There is, however, an other way that takes less capital: options. This is accomplished by employing in-the-money call options that imitate the stock’s movement. The deeper the call option is in the money—that is, the closer the delta is to one—the better the option price will mimic the stock’s movement.

Key Takeaways

  • Google (Alphabet, Inc.) has grown to become a household brand and one of the world’s most valuable firms by market capitalization.
  • Its shares are worth about $2 trillion and trade between $2,000 and $3,000, making it impossible for some individual investors to purchase an entire share, much alone many.
  • Option contracts, which sometimes trade at a fraction of the price of the real shares, are one method to wager on GOOG or GOOGL shares.

Google Option Chain

Take a look at the Google option chain retrieved from Nasdaq on September 3, 2014 for illustration purposes. An American call option is available.

Image by Sabrina Jiang © Investopedia2021

An Options Example

If you have a short investing horizon, as illustrated in the table above, you might definitely take a call option expiring on October 18, 2014. The striking price is the price at which you have the option to acquire the shares but not the responsibility to do so. The premium price or the final price is the cost of having this choice. As the strike price falls, the call option becomes more in-the-money, and the premium rises. The bid-ask spread is affected by volume, which is the number of option contracts exchanged. The greater the volume, the narrower the bid-ask spread; the narrower the gap, the greater the savings on transaction expenses for the investor.

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If you purchase the 520 strike Google option for $61.20, the breakeven price (BEP) is $581.20. The stock was trading about $575 on September 3, 2014. If the stock remains at $575 until October 18, the option price should fall to $55, since the strike price ($520) plus the premium ($55) would then equal the stock price ($575), thereby negating any arbitrage possibility.

Because the option’s delta is one, every change in the stock price should affect the option price by the same amount. For example, if the stock price increases to $600 at expiration, the option price becomes $80 ($600-$520), resulting in a gain of $18.80, which is $6.20 less than the stock’s $25 gain. The $6.20 reflects the option’s time value, which will gradually decay to zero upon expiration.

Opportunity andProtection

Another advantage of utilizing options to invest in Google or any other firm is the security it provides if the stock falls rapidly. The fact that you do not own the stock, but simply have the option to purchase it at a set price, protects you if it falls in value. This is because you will only lose the premium paid for the option rather than the stock’s real value.

Assume you owned 100 shares of Google in 2014, and they dropped significantly from $575 to $100. This equates to a $47,500 loss. However, if you had a call option on 100 Google shares, you would have simply lost the price paid. If you had paid $61.20 per share for a call option on 100 shares of Google, you would have lost just $6,120 rather than $47,000.

  Gann Indicators Definition

Longer-term options are more illiquid than shorter-term options, hence transaction costs in the form of a bid-ask spread are greater. Figure 2 indicates that the number of transactions for call options expiring in June 2016 was lower than in March 2015, which was lower than in October 2014. As a result, long-term investing in a company utilizing options would have been prohibitively costly and complicated. Rolling over the options at each expiration would be one possibility, but this would raise transaction expenses in the form of increased brokerage fees.

Image by Sabrina Jiang © Investopedia2021

Mini-options are available for certain corporations and other assets, with the underlying being 10 shares rather than 100. This is excellent for smaller investors and for hedging odd quantities of a certain stock that are not multiples of 100. Unfortunately, these alternatives are not in great demand, and mini-options are not as prevalent as standard options.

The Bottom Line

Using options is a low-cost approach to obtain exposure to a company without putting too much money at risk while yet being protected on the downside. One of the primary disadvantages is the option contract’s lack of liquidity. If you want to invest in firms with high stock prices (such as Amazon (AMZN), Tesla (TSLA), or Google) without tying up too much funds, options may be the way to go.

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