Alphabet Inc. (GOOG, GOOGL) stock looks undervalued to investors shorting out-of-the-money GOOG and GOOGL put options in huge volumes today. These investors are taking advantage of short-term income opportunities by shorting these puts.

This has been reported in Barchart's Unusual Stock Options Activity Report today, as can be seen in the table below.

It shows that investors are trading $190 and $187.50 put options in volumes that are 56x to 250x the prior number of outstanding options contracts.

Why would they be doing this? 

Shorting Puts for Income

It's possible most of these contracts were initiated by short-put investors. They are likely taking advantage of income opportunities for the next two days.

For example, look at the first tranche above. It shows that at the bid price, the $190 put expiring this Friday, Dec. 13, trades for $1.02. That is almost 2.0% below today's price, but yields 0.537% to short-put investors (i.e., $1.02/$190.00).

In other words, the investor stands to make income while waiting for the stock to fall. These investors may be willing to hold on to GOOGL stock even if they are assigned to buy shares at $190.00

Upside Potential

I discussed the upside in Alphabet stock in a recent Dec. 2, 2024, Barchart article, “Alphabet Stock is Trading Flat, But Shorting OTM Puts is Still a Good Play, ". In addition, in an Oct. 30 article, I showed how the stock could be worth $244 per share. This is based on the company's strong free cash flow (FCF) and FCF margins.

Moreover, the target price is now even higher. For example, analysts now project revenue will reach $390.84 billion next year. That is up from $386.6 billion in my Oct. 30 article.

Therefore, at Alphabet's existing 20% FCF margins it could generate $78.2 billion in FCF. Using a 2.5% FCF yield, its typical average, the stock would be worth $3,128 billion (i.e., $78.2b/0.025).

That is 31% over today's market cap of $2.387 billion. In other words, GOOG stock is worth 31% more, or $253.56 per share (higher than my previous $244 price target).

Since then, analysts have raised their price targets on the stock. For example, at the time, Yahoo! Finance showed that the average analyst price target was $204.93. Today, its average is $206.69. 

Similarly, 43 analysts surveyed by AnaChart.com indicate that the average price target is $208.38.

The bottom line is that investors like what they see today in Alphabet stock. One way for existing investors in GOOGL and GOOG stock to play this is to sell short OTM put options both to make extra income and to set a lower buy-in price.