Option Sir Breaks Down Hot Topics | Software Stocks Rally as the Narrative of 'AI Disrupting the Software Industry' Sees a Reversal?

YesterdayAI application software stocks $Datadog (DDOG.US)$ Released its Q1 earnings report, with revenue growing 32% year-over-year, surpassing market expectations, and its stock price surged over 30% in one night. Similarly, $Fortinet (FTNT.US)$ Revenue increased by 20.13% year-over-year, net profit rose by 23.33% year-over-year, and the stock price surged by 20.03%. Feedback from senior management during the earnings call highlighted strong performance driven by artificial intelligence and across all business segments. These stable results alleviated market concerns about the previous 'AI impact on the software industry,' leading to a collective rise in software stocks. $Snowflake (SNOW.US)$Increase by 10%.$Palo Alto Networks (PANW.US)$ Up 7%, software ETF $iShares Expanded Tech-Software Sector ETF (IGV.US)$ Up 3.2%, cloud computing ETF $Wisdomtree Cloud Computing Fund (WCLD.US)$ Up approximately 3.2%.

Revision of pessimistic narratives: AI is a 'magnifier' for software, not a 'terminator'.

By late 2025 to early 2026, the dominant market narrative was 'AI impact on SaaS software.' The primary concern was that AI agents could directly write code and build processes, replacing current SaaS software functionalities and undermining the pricing power growth of related companies. However, the previous decline in software stocks was mainly driven by emotional panic. Although the risk of software being replaced by AI still exists, the short-term impact is limited.

The dominant market narrative logic has now reversed:The more AI is deployed, the greater the need for software tools.Due to the AI model itselfbeing a 'black box, highly complex, high computational power, high-risk' emerging phenomenon., after enterprises extensively adopt AI, not only will the reliance on traditional software not decrease, but there will also be a surge in demand for monitoring ( $Datadog (DDOG.US)$ ), security ( $Zscaler (ZS.US)$ ), data governance ( $Snowflake (SNOW.US)$ ), and DevOps ( $MongoDB (MDB.US)$ ).

Earnings reports have validated resilient demand, rather than just telling a story.

The most direct catalyst is the recent better-than-expected earnings performance of software stocks, which factually validates that AI development is driving an increased demand for software.

DDOG (Monitoring): Revenue up 32% year-over-year, net profit up 113%;

FTNT (Security): Revenue up 20.13% year-over-year, net profit up 23.33%;

PLTR (Big Data Platform): Revenue up 84.71%, net profit up 306.73%;

The market's favorite combination is when 'growth + upward guidance revisions + AI beneficiary narrative' converge, which will drive momentum for Snowflake, $Dynatrace (DT.US)$ 、 $Elastic (ESTC.US)$ , Zscaler, $Palo Alto Networks (PANW.US)$ and other related software/security stocks are being revalued together.

Valuation recovery after an oversold rebound

Taking DDOG as an example, from the end of 2025, AI's impact on software stocks caused its share price to be cut in half. However, after earnings were released, the narrative was somewhat updated. As the complexity and compliance risks of AI increase, demand for related software continues to grow, triggering short covering + capital rush-in, leading to a rapid valuation recovery.

Once the leading earnings reports prove that AI represents incremental demand rather than pure substitution, the 'AI eating SaaS' narrative may peak temporarily.The key is whether this evidence of 'AI-driven demand spilling over to software' can be continuously verified in the earnings reports of more companies such as Snowflake, CrowdStrike, Zscaler, and Salesforce.

Key dates to watch going forward:

ZS earnings report: May 26

SNOW earnings report: May 27

CRM earnings report: May 27

CrowdStrike Earnings Report: June 3rd

Options Strategy

If you believe the upcoming earnings report will validate further gains in software stocks, utilizing options to track the upside of the underlying stock at a lower cost would be more appropriate.

In the options market, we use the option with the highest trading liquidity as an example. $Palantir (PLTR.US)$ Following yesterday's significant rise in Datadog, the put/call ratio for Palantir reached 0.39,The market is generally betting that high expectations from the earnings report will drive software stocks higher.

1. If you are optimistic about future demand and upward trends for software-related stocks,

You can do so byBuying call optionsBetting on further validation of new narratives driven by subsequent software stock earnings reports, which could push related stock prices higher.

2. If you seek long-term growth and are concerned about time decay in short-term options

then you can sell a Call option above the one you bought, forminga Bull Call Spread, the premium collected from selling the higher strike Call can partially offset the time decay of the purchased Call, resulting in a more moderate profit and loss profile compared to buying a standalone option.

3. If you are concerned about a pullback or profit-taking after a rebound in the related stock,

then you canbuy a Put optionto hedge and protect your bullish position.

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