President Donald Trump spoke about the Iran war on primetime television last night. If anyone was hoping for a definitive answer about the future, they didn’t get one. Instead, investors are likely to see stocks fall on the last trading day before Good Friday.
The price of West Texas Intermediate (WTI) crude jumped by 8% immediately following the president’s speech. As a result, the likelihood of a rate cut by the Federal Reserve in 2026 fell to 10%.
Let’s face it, folks, we’ve had it pretty good the past few years. The S&P 500 entered 2026 seeking a fourth consecutive year of positive gains. Up until the last week of February, it was battling hard. Thirty-three days and one ongoing war later, the odds of a four-peat are gradually slipping away.
I expected a correction given the extended run since the index hit a 5-year low in September 2022. However, a war in Iran was not on my list of scenarios for stock market declines in 2026.
With absolutely no idea what happens next with stocks -- except for the VIX moving higher -- the best move for investors is to focus on good companies whose stocks have been hit in recent weeks.
One of these stocks is Alphabet (GOOG), one of the Mag 7. Down over 6% in 2026, it’s held up relatively well compared to the other six. Long-term, it should bounce back.
Alphabet’s Class C non-voting shares had two calls with Vol/OI (volume-to-open-interest) ratios that were unusually active yesterday. They set up perfectly for a Covered Ratio Spread.
Happy Easter!
The Options in Question
Okay, the Vol/OI ratios aren’t exactly screaming out for attention, but they meet the criteria, and I’ve always liked the company’s business. Who wouldn’t?
Here we have two OTM (out-of-the-money) call options expiring on May 1, 30 days from yesterday. The $310 strike is 5.12% OTM, while the $330 is 11.90%. The expected move by May 1, up or down, is $21.26, or 7.21%.
Given the difference in moneyness between the $310 and $330 strike prices, it’s not surprising that the ask price for the former is over three times higher. With a bit of luck and good news on the Iran front, there’s every reason to believe the share price can get to the $316.90 breakeven in four weeks. As a result, the Vol/OI ratio was over five times higher than the $330 call.
Why the Covered Ratio Spread Strategy
Before I answer the question of why, let me explain how the strategy works.
The covered ratio strategy is about generating income for investors long a particular stock; in this case, Alphabet. Generally, an optimum DTE (days to expiration) for this strategy is 30 to 60 days.
The strategy, based on GOOG stock, involves being long the stock, short two calls at $310 and long a call at the higher $330 strike price. They all have the same expiration date of May 1.
Essentially, you want the stock to move higher, but not above $310. Therein lies the risk. Based on the expected move, GOOG’s got a shot at being above $310 by May 1.
So, why make this bet? As I said, for income.
Based on the information above, the one long $330 call’s ask price is $2.16; the two short $310 call’s bid price is $6.10. The net credit is $10.04, a 3.4% return (41.4% annualized).
While that’s a healthy return, the share price could be higher than $310 on May 1. A lot depends on what happens in Iran between now and then. I’m skeptical that a positive outcome for the entire world -- oil prices are set and influenced globally by many factors, not just production -- can be achieved in the next 30 days. Even Trump’s best estimate is 2-3 weeks.
Assuming that holds, the shares are likelier to move lower than higher. I don’t know about you, but if I have to own a stock through this entire mess, Alphabet is in the top 10-25.
How Much Can You Lose?
Everything. But that only happens if the share price goes to $0. I have a better chance of getting hit by a bus. Seriously, though, that is not going to happen to a company with $73.31 billion in free cash flow as of Dec. 31, and that’s after spending $91.45 billion on its business in 2025.
Investing is about probability. How likely is it that the shares will fall by 5%, 10%, 20%, or more over the next 30 days? That’s the million-dollar question.
But, for this article, let’s assume it falls by 10%. Assuming we’re buying shares at yesterday’s close ($294.90), your loss would be $1,945 [$294.90 purchase price - $265.41 share price at expiration - $10.04 net credit * 100 shares].
If it falls 20%, the loss is $4,894; down 30%, it’s $7,843, and so on.
Back to probability, a 30% decline based on expected moves would happen with a call expiring in January 2028. A 20% decline would be Dec. 18, and a 10% decline would be in June.
And that’s if you bought at $294.90. What if you bought around $150 a year ago? Even at the 30% decline, you’ve still got an unrealized gain of 38%, plus the $1,004 in premium.
What If GOOG Jumps 30%?
Assuming a 30% jump in the next month -- the only way that happens is if the war stops, the Strait of Hormuz fully opens, and the Iranians agree never to fire off another weapon against their neighbours in the Middle East, including Israel. That's unlikely -- the two scenarios play out as follows:
1) You bought 100 shares at $294.90, and they’re $383.37 on May 1.
- You sell 100 shares at $383.47 for an $8,857 profit.
- You close both short $310 calls at a cost of $14,674 [$383.37 share price - $310 strike price * 200 shares].
- You sell your long $330 call for a $5,337 profit [$383.37 share price - $330 strike price].
- You pocket the $1,004 in premium income.
In this situation, you’ve got a $9,337 loss on the options, an $8,857 profit on the stock appreciation, and $1,004 in premium for a net gain of $524.
2) You bought 100 shares at $150 a year ago, and they’re $383.37 on May 1.
- You sell 100 shares at $383.47 for an $23,347 profit.
- You close both short $310 calls at a cost of $14,674 [$383.37 share price - $310 strike price * 200 shares].
- You sell your long $330 call for a $5,337 profit [$383.37 share price - $330 strike price].
- You pocket the $1,004 in premium income.
In this situation, you’ve got a $9,337 loss on the options, a $23,347 profit on the stock appreciation, and $1,004 in premium for a net gain of $15,014.
Of course, if you had just held the shares you bought a year ago, without the three calls, your profit would be 56% higher than the $15,014.
Ideally, you want the three calls to expire worthless right at the short $310 strike, pocketing the $1,004, 41% annualized return.
The covered ratio spread is definitely a more advanced options strategy. I wouldn’t make this your first options trade.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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