Alphabet's record sell-off may be a buying opportunity, trader says

Alphabet shares have barely recovered from the worst one-day drop in the company’s history, and one options trader is betting the record sell-off has created a buying opportunity, CNBC reported.

Ten days after the drubbing, Alphabet has retraced a fraction of its nearly $500 billion in lost market capitalization, rallying just 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. The earnings were the first major crack to appear in the AI trade and foreshadowed a series of volatile events for the sector, including the midterm elections and the growing scandal around Nvidia CEO Jensen Huang.

Julia Spina, an options trader writing for CNBC Pro, is buying the December 18 285/300 call spread on Alphabet for a debit of roughly $7.07. The trade expires in 39 days and assumes the gap between the current price and the pre-earnings close at least partly closes by then. Alphabet is down 11.3 percent from its pre-earnings close of $324.89. The long 285 call sits just in the money, and the short 300 call sits about halfway back from the post-earnings low to the pre-earnings close. The breakeven is $292.07, 1.4 percent above Monday’s close and still about 10 percent below pre-earnings levels.

The trade has a theoretical probability of profit of 47 percent and reaches its maximum profit of $793 per spread if Alphabet closes at or above $300 on Dec. 18. The maximum loss of $707 comes if shares close at or below $285. If Alphabet closes between $285 and $300 on expiration, the long call can be exercised, leaving investors holding 100 shares per spread. The structure is a directional bet on a continued rebound, with defined risk on both ends.

Alphabet’s 30-day implied volatility closed Monday around 35 percent, higher than about 44 percent of days over the past year. That is mid-range, which means either buying or selling premium can be viable. Spina chose the higher-conviction bull call spread over selling a put spread because of the sheer size of the drop and the weak recovery thus far. A bull call spread needs the stock to rally to pay off but offers a larger payout if the view is right. A put spread can carry a higher probability of profit but with a smaller reward relative to the risk.

The bullish case for Alphabet rests not on its post-earnings concerns being unfounded, but 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 search business is still a cash machine, Google Cloud is growing at a rate that rivals any competitor, and the company has 13 consecutive quarters of double-digit revenue growth. The sell-off was not about the business being broken. It was about the valuation being too high for the growth rate, and about the AI trade losing its halo.

The main risk to the trade is that the recovery stalls. Nvidia reports earnings on Nov. 17, and those results could reset the entire AI complex, CNBC noted. If Nvidia disappoints, the AI trade takes another leg down and Alphabet goes with it. Rates, energy prices, and scrutiny of data center construction remain headwinds. The Federal Reserve is now pricing in a rate hike for December after a hot CPI report, which puts upward pressure on Treasury yields and downward pressure on the multiples investors are willing to pay for growth stocks.

What I think

The $500 billion number is the one that matters. Alphabet lost half a trillion dollars in market cap in a single day after reporting 25 percent revenue growth. That is not a company in trouble. That is a market that got ahead of itself on valuation and corrected violently when the growth rate, however strong, did not justify the price. The question is whether the correction is over or whether the stock has further to fall.

Spina’s call spread is a reasonable way to express a bullish view with defined risk. The 47 percent probability of profit is honest; this is not a high-conviction trade, it is a value trade. The stock dropped 11 percent from its pre-earnings close, and the bet is that some of that gap closes over the next 39 days. The maximum profit of $793 per spread against a maximum loss of $707 is nearly symmetric, which reflects the uncertainty. If I were bullish on Alphabet, this is the kind of structure I would use: defined risk, defined reward, and a breakeven just 1.4 percent above the current price.

The Nvidia earnings on Nov. 17 are the wildcard. If Nvidia beats and raises, the AI trade gets a second wind and Alphabet recovers with it. If Nvidia misses or guides down, the AI trade takes another hit and Alphabet’s recovery stalls. Spina’s trade expires Dec. 18, which gives it five weeks to work. That is enough time for the Nvidia earnings to move the stock in either direction, but not enough time for a slow grind back to pre-earnings levels if the recovery is gradual.

The deeper question is whether the AI trade is broken or just bruised. Alphabet’s earnings showed that AI revenue is real but not growing fast enough to justify the valuations the market was paying. That is a valuation problem, not a business problem. The business is growing 25 percent with cloud revenue doubling. If the multiple contracts from 30 times earnings to 25 times, the stock can still work from here. If the multiple contracts to 20 times because rates are rising and the AI halo is gone, the stock has further to fall. The trade is a bet on where the multiple settles, and that depends on the Fed and on Nvidia.