Investors are trading Alphabet Inc (GOOGL) call options in heavy volume today, showing, for the most part, they are very bullish on Alphabet. GOOGL is down over 11.5% from its pre-earnings release peak, a great opportunity for value investors.
GOOGL is at $303.78 in morning trading on Wednesday, March 4. That's down from a Feb. 2 peak of $343.69, just before its Feb. 4 earnings release.
Free Cash Flow Results
I discussed Alphabet's strong free cash flow (FCF) in a Feb. 8 Barchart article, “Why Alphabet's Free Cash Flow Could Survive, Despite the Market's Fears - How to Play GOOGL.”
For example, its FCF rose to $73.2 billion in 2025, a 18.2% FCF margin. This FCF was up almost 1% from a year earlier, despite a 74% increase in capex spending relating to AI investments.
This was because the operating cash flow margin rose to 40.9%, up from 35.8% in the prior year.
Using management's guidance on capex, showing it could double, Alphabet could still generate a positive free cash flow of $55 billion in 2026. It could rise to $72 billion by 2027.
That means that the drop in Alphabet stock may have been overdone.
Price Targets for GOOGL Stock
For example, using a 1.50% FCF yield, GOOGL stock could be worth $3.67 trillion (i.e., $55b/0.015). That's about equal to today's valuation of $3.87 trillion.
And next year, if FCF rises to $72 billion, Alphabet's valuation could rise to $4.80 trillion (i.e., $72/0.015), i.e., up +24%. That puts the next 12 months (NTM), GOOGL could rise to $376.69 per share (+24%).
Analysts tend to agree. For example, Yahoo! Finance reports 68 analysts have an average price target (PT) of $359.24 per share. Similarly, Barchart's mean analyst survey PT is $379.11, and AnaChart's survey of 35 analysts is $339.86.
In other words, the decline in GOOGL stock may have been overdone. That could be why investors are piling into GOOGL call options today.
Unusual Volume in GOOGL Calls
This can be seen in today's Barchart Unusual Stock Options Activity Report. It shows that almost 1,000 call option contracts have traded at the $302.50 strike price for expiry on March 9, 2026 (Monday).
That means that these call options are in-the-money (ITM), since the strike price is below the spot price. Investors buying these calls believe that GOOGL will stay over $302.50 by Monday. They are willing to pay about $4.97 at the midpoint, setting the long investment breakeven point at $307.47.
That breakeven point is only 1% or so higher than today's price.
Moreover, covered call sellers of these calls may be willing to accept this income, even if they have to sell their shares at $302.50.
For example, the total return for a buyer at $303.78 is 1.20%:
Income = ($4.90-$1.28) = $3.65 (i.e., $303.78-302.50 strike)
$3.65/$303.78 = 1.20%
Making 1.20% for five days by selling covered calls is a great profit.
This is a risky bet, however, since if GOOGL falls below $302.50, the covered call seller (as well as the call buyer) could have a loss.
That is why investors should be careful in copying this trade, as the short expiry period could be a highly volatile and speculative trade.
It would be better to sell out-of-the-money (OTM) puts one month away and buy long-dated call options, as discussed in the Feb. 8 Barchart article.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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