When a stock gaps up or down, it can be an opportunity for trader and especially an options trader. Here is a trade idea on a stock that jumped higher on some good news but the area it gapped to might make it difficult for the stock to keep heading even higher.
Akamai Technologies Inc. (NASDAQ:AKAM) Call Credit Spread
The trade: Sell December 40/42 Call Credit Spread (selling the December $40 call and buying the December $42 call) for 40 cents or better.
The strategy: The maximum potential profit for this trade is $0.40 if AKAM is trading below $40 at December expiration. The maximum loss is $1.60 ($2 minus 40 cents) if AKAM is trading above $42 at December expiration. Breakeven is $40.40 at expiration based on a $0.40 credit.
The rationale: Shares of Akamai soared over 10% on Thursday as it was announced that the company formed an alliance with AT&T to provide CDN (content delivery network) services. That is fantastic news for the company and great news for the stock. But if traders take a closer look, it is apparent that the stock has gapped into some congestion. That congestion is where the stock traded for most of September and October, between $38 and $40. AKAM has not been able to close above resistance of $40 in over a year. If AKAM stock moves lower, trades sideways or cannot get over the resistance level before December expiration, the premium is the trader’s to keep. Consider it a bullish sign if AKAM gaps or closes above $40.