Amid the uncertainty (and resulting volatility) in the market for the past several weeks, it might be a good idea to look at some short-term trades that assume the market can change in a flash. This idea focuses on a stock that we all know, and can profit under a few scenarios:
Google (GOOG — $880.93): Call Credit Spread
The trade: Sell the Jun 28 900/905 Call Credit Spread (selling the Jun 28 900 call and buying the Jun 28 905 call) for a 50-cent credit or better.
The strategy: The maximum potential profit for this trade is 50 cents if GOOG is trading below $900 at Jun 28 expiration. Both call options would expire worthless. The maximum loss is $4.50 (5 – 0.50) if GOOG is trading above $905 at Jun 28 expiration. Breakeven is $900.50 at expiration based on a credit of 50 cents.
The rationale: This is another trade idea where we could talk about the fundamentals of the company until we are blue in the face, but what it really boils down to is price action this week.
With this recent market selloff, many stocks (GOOG included) have taken a hit in price. The question now is whether investors and traders feel like GOOG is a good buy at this level, and whether this bearishness will continue.
Click to Enlarge That remains to be seen, but GOOG has a pretty significant pivot area right around $900 that it had trouble moving past last week. GOOG has a pivot area at $880 (where it is currently trading) that can be considered minor support. If that area fails to hold, it might say hello to $860, which is the next level of support for the stock.
In addition, the current 30-day implied volatility currently is greater than the 30-day historical volatility, making options just slightly overpriced — a plus for sellers.
GOOG has been strong, but it might have a tough time moving higher in this choppy market.
As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities.