So much for dead cat bounce.
Ten days after Alphabet’s stock experienced its worst single-day selloff in history, the search, media and AI giant has barely regained nearly $500 billion in lost market capitalization, rising just 1.5%. The slow recovery stands out for a company that has posted 13 consecutive quarters of double-digit revenue growth in the same report, with Google Cloud’s revenue more than doubling. Alphabet’s results were the first major rift in the AI industry and presaged a series of volatile events for the company, including the election and the growing scandal surrounding Nvidia CEO Jensen Huang.
Still, the basis for Alphabet’s bullishness is not that the post-earnings concerns are unfounded, but rather that the company’s growth is strong enough to withstand them. On Monday, Google announced two new systems built on its custom AI chip, the TPU, in a sign that the company continues to evolve and the debate over AI and search is far from over. Its steep decline, a record one-day loss after a quarter in which sales rose 25%, could also leave room for earnings to return to previous levels. For investors who agree with this, options offer a variety of ways to express that view.
trade
Based on Monday’s closing price, I would buy the December 18 285/300 call spread with a debit of approximately $7.07.
Alphabet’s 30-day implied volatility was about 35% at Monday’s close, higher than about 44% over the past year. Since this is mid-range, it is viable to either buy or sell premium in this trade. Bull call spreads are a higher-conviction route. The stock price will have to rise to pay it back, but if you’re looking at it correctly, you can get even bigger dividends. Selling a put spread is a lower-conviction route. The probability of profit is high, but the reward is small compared to the risk.
Alphabet from the beginning of the year
I’m opting for higher-conviction call spreads because the decline has been so large and the recovery so far has been weak.
Alphabet has recouped only a small portion of its post-earnings losses, but is still down 11.3% from its pre-earnings closing price of $324.89. The deal expires on Dec. 18 and envisions the gap closing at least partially, not necessarily immediately, but at some point in the next 39 days.
The long 285 call is located exactly within the money, and the short 300 call is located approximately midway between the post-closing low and the pre-closing close. This gives the deal a breakeven point of $292.07, 1.4% above Monday’s closing price but still about 10% below pre-earnings levels.
The theoretical profit probability for this trade is 47%, and if Alphabet closes above $300 on December 18th, the maximum profit per spread would be $793. If the stock closes below $285, your maximum loss is $707. If Alphabet closes between $285 and $300 on Dec. 18, the long call can be exercised and investors will own 100 shares per spread. Investors can close the spread before maturity to capture profits, cut losses, or avoid acquiring the stock.
This is a bet on continued recovery, with the main risk being that the recovery stalls even for historically strong companies. Nvidia’s Nov. 17 earnings results could set the tone for the AI industry, with monitoring of pricing, energy prices, and data center construction remaining headwinds to watch.
Disclosure: Spina is long on this trade.
All opinions expressed by CNBC Pro contributors are solely their own and do not reflect the opinions of CNBC, its parent or affiliate companies, and may have been previously disseminated on television, radio, the Internet, or another medium. This content is provided as part of editorial output for informational purposes only and does not constitute financial, investment, tax, or legal advice or a recommendation to purchase any security or other financial asset. The content is general in nature and does not reflect any individual’s unique personal circumstances. The above may not be appropriate for your particular situation. Before making any financial decisions, you should strongly consider seeking the advice of a financial or investment advisor.
This content is provided for informational purposes only and does not constitute financial, investment, tax, or legal advice or a recommendation to purchase any security or other financial asset. The content is general in nature and does not reflect your unique personal circumstances. The above may not be appropriate for your particular situation. Before making any financial decisions, you should strongly consider seeking the advice of your own financial or investment advisor.
Click here for full disclaimer.
