Google parent company Alphabet plunged Wednesday following the earnings call due to weakness in their cloud business.
Google stock is below the 50-day moving average, which currently sits around 135.
Traders who think GOOGL will not reclaim the 50-day line in the next few weeks could look at a bear call spread option trade.
A bear call spread involves selling an out-of-the-money call and buying a further out-of-the-money call.
The strategy can be profitable if the stock trades lower, sideways, and even if it trades slightly higher, as long as it stays below the short call at expiry.
An Alphabet bear call spread using the Nov. 17 expiry and the 135-140 strike prices could be sold for around $0.50 late Wednesday.
How Google Stock Trade Profits
Traders selling the spread would receive $50 in option premium. That's also the maximum possible gain. The maximum loss would be $450.
The spread will achieve the maximum profit if Google stock closes below 135 on Nov. 17. In that case the entire spread would expire worthless, allowing the trader to keep the $50 option premium.
The maximum loss will occur if Alphabet closes above 140 on Nov. 17, which would see the premium seller lose $450 on the trade.
While some option trades have the risk of unlimited losses, a bear call spread is a risk-defined strategy, You always know the worst-case scenario in advance.
Setting Stop Loss For Trade
A stop loss could be set if the spread value rises from $0.50 to $1, or if Alphabet crosses back above 130.
Because this is a bearish position, traders who think Google stock could move higher from here should not enter this trade.
According to the IBD Stock Checkup, Alphabet is ranked No. 1 in its industry group. It has a Composite Rating of 99, an EPS Rating of 97 and a Relative Strength Rating of 93.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
