Ten days after Alphabet shares experienced their worst one-day drubbing in its history, the search, media and AI giant has barely retraced a faction of its nearly $500 billion in lost market capitalization, having rallied just a paltry 1.5%. The muted recovery stands out for a company that posted its 13th straight quarter of double-digit revenue growth in the same report, with Google Cloud revenue more than doubling. Alphabet's earnings were the first major crack to appear in the AI trade and foreshadowed a series of volatile events for the complex, including the election and the growing scandal enveloping Nvidia CEO Jensen Huang.
Still, a bullish case for Alphabet rests not in its post-earnings concerns being unfounded, but rather on its growth being strong enough to withstand them. On Monday, Google launched two new systems built on its custom AI chip, the TPU, a sign the company keeps evolving, and the debate over AI and search is far from settled. The sheer size of the drop, a record one-day loss after a quarter of 25% revenue growth, may also leave room for a reversion toward pre-earnings levels. For investors who agree, options offer a variety of ways to express that view.
Based on Monday's close, I'm buying the December 18 285/300 call spread for a debit of roughly $7.07.
Alphabet's 30-day implied volatility closed Monday around 35%, higher than about 44% of days over the past year. That is mid-range, so either buying or selling premium can be viable for this trade. A bull call spread is the higher-conviction route. It needs the stock to rally to pay off, but it offers a larger payout if the view is right. Selling a put spread is the lower-conviction route. It can carry a higher probability of profit, but with a smaller reward relative to the risk.
Due to the sheer size of the drop and the weak recovery thus far, I'm choosing the higher-conviction call spread.