When looking for bearish option trade candidates, Google parent Alphabet is one stock that might fit the bill.
Wednesday, GOOGL stock closed near the low of the day and broke below the 21-day and 50-day moving averages.
That type of action could spell more downside for the stock. Assuming traders have a price target of 85 for Alphabet, they could look at a bearish calendar at that strike price.
A bearish calendar is negative delta and positive vega, so can do quite well when the stock drops.
A calendar spread is a trade that involves selling a short-term option and buying a longer-term option with the same strike price.
Traders typically use call options unless the trade has a bearish bias, in which case they would use puts.
Setting Up Calendar Spread On Alphabet
Let's take a look at an example of a bearish calendar spread on GOOGL stock.
Based on Wednesday's closing prices, traders could sell the January 85 strike put for around $1.30, then buy the February 85 strike put for around $2.60.
That results in a net cost for the trade of $130 per spread, and that is the most the trade can lose.
The estimated maximum profit is around $260, but that could vary depending on changes in implied volatility.
The idea with the trade is that if GOOGL stock trades down around 85 in the next few weeks, the calendar spread will increase in value allowing the trade to be closed for a profit.
Trade Equivalent To Shorting 5 Alphabet Shares
The position starts with a delta of -5, meaning the exposure is roughly equivalent to being short 5 shares of Alphabet, although this will change as the trade progresses.
According to the IBD Stock Checkup, GOOGL stock is ranked No. 4 in its industry group and has a Composite Rating of 47, an EPS Rating of 78 and a Relative Strength Rating of 24.
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
