This tech stock rally has been one for the ages. But now is not the time for bulls to rest on their laurels. Overbought conditions in the Nasdaq Composite coupled with Thursday’s down day make now the perfect time to get defensive. And what better way to do that then add some bearish plays to the portfolio? Akamai Technologies, Inc. (NASDAQ:AKAM) is looking particularly vulnerable, so let’s see what kind of trade we can drum up in AKAM stock.
All was going swell with Akamai until this month’s earnings announcement. The cloud services provider was perched near 52-week highs heading into the quarterly dance. And then, AKAM dared to disappoint the Street. Note that Akamai recorded beats on both the top and bottom lines — but apparently those beats simply weren’t enough.
Mercy was thrown out the window, and sellers took AKAM stock down 10% by day’s end. Since then, the stock has been drifting lower in bearish fashion.
Though the 200-day moving average is still pointing higher, the 20-day and 50-day averages have rolled over. And that means any and all rallies in Akamai stock are suspect.
The level to watch moving forward is $62. A break of this support zone could lead to a gap-fill carrying shares down to $59.
The Trade on AKAM Stock
To capitalize on continued bearish behavior, consider selling April bear call spreads. The strategy enables you to profit from the passage of time. One of the biggest benefits to the bear call spread is its high probability of profit. We can create a wide profit zone that generates modest rewards if Akamai does anything but rally significantly.
Sell the Apr $65/$67.50 call spread for 64 cents. The position consists of selling to open the $65 call while buying to open the $67.50 call. Your reward will be limited to the 64 cents which will be captured if AKAM stock sits below $65 at expiration.
The risk is limited to the distance between strikes minus the net credit, or $1.86, and will be forfeited if AKAM rallies above $67.50 by expiration.
If you’re looking for more downside confirmation before entering the trade, consider waiting for a break of the previously mentioned $62 support level.
As of this writing, Tyler Craig had no positions in any of the aforementioned securities.
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