How Google Provides A Better Short Option Than Other Mag 7 Stocks
Google-parent Alphabet (GOOGL) is one of the weaker stocks in the Nasdaq at the moment, having dropped 21% in the last three months. Compare that with Apple (AAPL), down 8.5%, and Microsoft (MSFT), which has lost 16%.
For that reason, Google is a better short opportunity than some of the other Magnificent Seven companies. Google is below its already declining 50-day and 200-day moving averages with a strong resistance zone between 160 and 165.
Let's look at a bear call spread that assumes Google will struggle to get back above the 170 level between now and mid-June.
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.
Maximum Gain, Loss On This Bear Call Spread
A June 20 expiry bear call spread on Google stock using the 170-175 strike prices can be sold for around $1.20. Traders selling the spread would receive $120 in option premium which is also the maximum possible gain. The maximum loss would be $380.
That represents a potential return of 31.6% between now and June 20.
The spread will achieve the maximum profit if Google stock closes below 170 on June 20, in which case the entire spread would expire worthless, allowing the trader to keep the $120 option premium.
Further, the maximum loss will occur if Google closes above 175 on June 20. That would see the premium seller lose $380 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. A stop loss could be set if Alphabet trades above 165, or if the spread value rises from $1.20 to $2.40.
Google Stock: Generating Income In A Tough Market
Bear call spreads can be a good way to potentially generate some income while the market remains under pressure.
Even though Tesla (TSLA) has rallied recently, that bear call spread is still looking OK thanks to the drop in implied volatility.
According to Investor's Business Daily's IBD Stock Checkup, Google stock is ranked No. 8 in its group and has a Composite Rating of 79, an EPS Rating of 97 and a Relative Strength Rating of 34.
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, and is conservative in his style. He believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.
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