2 FAANG Stocks With Cheap Options

Both FAANG stocks look well-equipped to handle COVID-19 headwinds

Bernie Schaeffer
Jul 8, 2020 at 2:49 PM
facebook twitter linkedin


The first half of 2020 felt like it came and went in a flash, yet was also an eternal slog through crisis after crisis. Perhaps the biggest beacon of consistency during that six-month roller-coaster was the tech-heavy Nasdaq, which raced across the six-month finish line with a double-digit year-to-date lead. It's an impressive feat considering the Russell 2000 Index (RUT) is down double digits and the S&P 500 is off by roughly 4% within the same timeframe. FAANG stocks Apple (AAPL) and Alphabet (GOOGL) have been emblematic of the Nasdaq's resiliency in 2020; both AAPL and GOOGL fought their way out of deep March troughs to keep resume their mad dash toward more highs by the summer months.

It would be safe to say then, that as these tech behemoths go, so too does the Nasdaq, and in a broader sense, the stock market? And more importantly, can you as a trader reconcile with their steep entry points? With that in mind, perhaps the options route offers up a prudent play toward the FAANG icons, especially considering there are short-term signals that at least imply a summer spark could be ahead.

According to data compiled by Schaeffer's Senior Quantitative Analyst Rocky White, both AAPL and GOOGL appear on a list of the 25 best performers in July, looking back over the past 10 years. More specifically, looking back over this last decade, Apple stock boasted an average June gain of 5.9%, with nine out of the 10 returns positive. GOOGL topped its tech counterpart, turning in an average 10-year gain of 9.4%, with 90% of its returns coming back positive. This average July returns is good for the best on the 25-stock list.

But AAPL has a leg up elsewhere in the technical picture. The former has a market cap of $1.6 trillion. That narrowly legs out Microsoft for the largest market cap among U.S companies, and makes Alphabet's own impressive $957 billion market cap seem inconsequential.

It's been a slow and steady grind to the market cap peak for Apple in the last five years. Per the chart below, the tech icon has added $1 trillion in market cap since its 2015-2016 lows, and for comparisons sake, that same $1 trillion level has stymied GOOGL thus far. The Google parent's accompanying chart does offer a reprieve, though. When looking at the price to sales per share ratio, AAPL's is clearly extending to extreme levels. GOOGL's, on the other hand, is off its extreme levels and drifting into the lower half of readings based on the last five years.

So based strictly on sales, AAPL has never been more expensive, while GOOGL -- and again it’s important to reiterate from a P/S ratio perspective – offers slightly more value. However, let's bring options back to the table. Apple has attracted the highest weekly options volume over the last 10 trading days, with 2.6 million weekly contracts traded.

Digging deeper, 1.6 million weekly calls have changed hands, with the weekly 6/26 270 call –which expired last Friday -- seeing the largest uptick in open interest during this time frame. So in an environment where both stocks appear to have stable technical footing, options traders are flocking to the iPhone maker more. Yet regardless of which stock options traders prefer, both FAANG names sport attractively priced premiums at the moment. AAPL and GOOGL's Schaeffer's Volatility Indexes (SVI) of 28% and 27%, respectively, both sit lower than the bottom 20th percentile of readings from the past year.

We've talked a lot in this space about the "uncertainty wrought from coronavirus." But Apple and Alphabet are for the most part both well-equipped to handle any new normal that the aftermath of COVID-19 creates. And at the same time, that doesn't necessarily negate the advantage of pursuing options compared to equities. Using call options in lieu of buying stock outright allows one to put less dollars at risk relative to equities, making the price tag --and historically, bullish July signals -- on the likes of AAPL and GOOGL far more appealing.

cotw jun 5 1

cotw jun 5 2

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, July 5.


A Schaeffer's exclusive!

The Expert's Guide

Access your FREE trading earnings guide for Q3 before it's too late!


  
 

Partnercenter