Alphabet shares have recovered little since their worst one-day drop on record, even after a strong earnings report. CNBC Pro contributor Julia Spina is using a call spread to bet on a rebound, and she names Nvidia's results as a risk to the trade.
Alphabet shares have rallied just 1.5% in the ten days since their worst one-day drop in the company's history, leaving most of a nearly $500 billion loss in market capitalization unrecovered. Spina writes that the size of the drop may leave room for a reversion toward pre-earnings levels.
Strong growth, weak recovery
The sell-off followed a report in which Alphabet posted its 13th straight quarter of double-digit revenue growth, with Google Cloud revenue more than doubling. Spina describes the earnings as the first major crack to appear in the AI trade.
Her bullish case rests not on the post-earnings concerns being unfounded, but on growth being strong enough to withstand them. On Monday, Google launched two new systems built on its custom AI chip, the TPU.
The December call spread
Based on Monday's close, Spina is buying the December 18 285/300 call spread for a debit of roughly $7.07. She chose this higher-conviction route because of the size of the drop and the weak recovery so far.
Alphabet's 30-day implied volatility closed Monday around 35%, higher than about 44% of days over the past year. Spina calls that mid-range, so either buying or selling premium can be viable. A bull call spread needs the stock to rally to pay off, while selling a put spread is the lower-conviction route.
The shares are still down 11.3% from their pre-earnings close of $324.89. The trade has a breakeven of $292.07, 1.4% above Monday's close.
Payoff and risks
The trade has a theoretical probability of profit of 47%. It reaches its maximum profit of $793 per spread if Alphabet closes at or above $300 on Dec. 18, while the maximum loss of $707 comes if shares close at or below $285.
Spina flags Nvidia's results on Nov. 17 as a possible tone-setter for the AI trade, with rates, energy prices, and scrutiny of data center construction remaining headwinds to watch. The main risk, she says, is that the recovery stalls, even for a historically strong company.
Source: CNBC
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