Alphabet shares have failed to fully recover from their most significant one day decline in company history. Ten days after the search and AI giant lost nearly $500 billion in market capitalization, the stock has rallied by only 1.5 percent. This muted response contrasts sharply with the company's recent financial performance, which included its 13th consecutive quarter of double digit revenue growth and a more than doubling of revenue in the Google Cloud division.
The recent volatility marks the first major disruption in the broader artificial intelligence trade. This event foreshadowed a series of market movements, including the upcoming election and the growing scrutiny surrounding Nvidia CEO Jensen Huang. Despite these concerns, a bullish perspective on Alphabet relies on the strength of its growth to withstand current pressures. On Monday, Google launched two new systems built on its custom AI chip, the TPU, signaling continued technological evolution and keeping the debate over AI's impact on search active.
The sheer magnitude of the initial drop, which followed a quarter with 25 percent revenue growth, may create room for the stock to revert toward pre earnings levels. For investors who align with this view, options trading provides several methods to express that outlook. Based on Monday's closing price, the strategy involves buying a December 18 call spread with strikes of 285 and 300 for a debit of roughly $7.07.
Alphabet's 30 day implied volatility closed Monday at approximately 35 percent, which is higher than about 44 percent of days over the past year. This mid range level suggests that either buying or selling premium can be viable. The selected bull call spread is a higher conviction route that requires the stock to rally for a payoff but offers a larger reward if the view proves correct. In contrast, selling a put spread offers a lower conviction approach with a higher probability of profit but a smaller relative reward.
The stock remains down 11.3 percent from its pre earnings close of $324.89. The proposed trade expires on December 18 and assumes that the gap between the post earnings low and pre earnings levels will at least partially close over the next 39 days. The long 285 call is slightly in the money, while the short 300 call is positioned about halfway between the recent low and the pre earnings price.
This structure results in a breakeven point of $292.07, which is 1.4 percent above Monday's close and still approximately 10 percent below pre earnings levels. The trade carries a theoretical probability of profit at 47 percent. Maximum profit of $793 per spread is achieved if Alphabet closes at or above $300 on December 18. Conversely, the maximum loss of $707 occurs if shares close at or below $285.
If the stock closes between $285 and $300 on expiration, the long call can be exercised, leaving investors holding 100 shares per spread. Traders may also choose to close the position before expiration to capture gains or limit losses. This is a directional bet on a continued rebound, with the primary risk being that the recovery stalls despite the company's historical strength.
External factors, including Nvidia's results scheduled for November 17, could set the tone for the AI sector. Other headwinds to monitor include interest rates, energy prices, and ongoing scrutiny of data center construction costs. CNBC Pro contributor Spina is noted as being long this specific trade. The opinions expressed are those of the contributors and do not reflect the views of CNBC or its affiliates.
This content is provided for informational purposes only and does not constitute financial, investment, tax, or legal advice. It is general in nature and does not reflect any individual's unique personal circumstances. Investors are advised to consult their own financial or investment advisors before making decisions based on this analysis.
