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Alphabet (GOOG, GOOGL) has a robust earnings and cash flow generation outlook. As a result, GOOG stock now shows attractive out-of-the-money (OTM) short call option and put option income plays.

The company recently completed a 20-for-1 stock split which lowered the absolute price of the stock. As a result, it is now much easier to short OTMcovered calls and also short cash-secured OTM put options.

This means that investors can create more income for their holdings. But first, let's look at the company's valuation. After all, it makes no sense to create option income for an overvalued stock that is likely to fall.
 

Alphabet's Valuation

But first, let's look at the company's valuation. After all, it makes no sense to create option income for an overvalued stock that is likely to fall.

For example, analysts now project that earnings per share (EPS) will rise 11.5% to $5.80 next year, up from $5.20 this year, according to Barchart's estimates. In addition, Seeking Alpha's survey of 42 analysts shows a forecast of $5.96 by 2023. And Refinitiv's survey of 37 analysts shows a projection of $5.88 in 2023. On average these 2023 EPS forecasts work out to $5.88.

So, at today's price (Aug. 24) of $115.63 per share, the stock trades for a forward P/E multiple of just 19.66x. By comparison, Morningstar reports that the average forward P/E multiple over the last 5 years has been 26.26x.

So theoretically, GOOG stock could be worth one-third more if it were to trade at its mean forward multiple. That puts its value at over $154 per share. We can use that to help us set the strike price in income plays.
 

Shorting GOOG OTM Puts And Calls For Income

It turns out that GOOG stock has some attractive out-of-the-money (OTM) short-call and short-put income plays.

For example, look at the table below from Barchart.

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GOOG - Call options - Expiration Sept. 23 - As of Aug. 24

This shows that the one-month out Sept. 23 expiration call options at the $123 strike price, which is less than 7% over today's price offer a $1.30 call premium. Here is what that means to a covered call investor.

The investor buys 100 shares at $115.63 for $11,563. Then he shorts the $123 call option and collets $130. That works out to a 1.12% yield or return on his investment. Assuming the stock does not rise to $123 by Sept. 23, the investor can repeat this again. So, the annualized return without compounding is equal to 13.49%.

And, of course, if the stock rises over $123, the calls will be exercised and the investor makes an additional 6.37% capital gain. Based on our analysis there is a good chance this could happen.

A more attractive way to play this, given how undervalued GOOG stock is now, is to short OTM put options. Look at the table below.

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GOOG - Puts for Expiration on Sept. 23 - as of Aug. 24

This shows that the $110 strike price put contract offers a $1.98 per contract premium. Here is what that means for a cash-secured put option short play.

First, the investor puts up $11,000 with his brokerage firm. That would cover the purchase of 100 shares at $110 per share. Then the investor shorts 1 put contract at $110 and immediately receives $198 in the account.

This works out to a 1.80% yield on the $11,000 potential cost for the shares over the next month. That is an annualized return of 21.60%. You can see that this is an even higher return than shorting covered calls. In addition, your potential buy-in cost is much lower.

The only problem is there is no potential capital gain as there is with the covered call play. This is why sometimes investors do both of these plays.

Either way, look for GOOG stock to continue to provide good income potential using these short put and call plays.

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