Trading Idea: Google (GOOG) Credit Spread

Google (GOOG) is the search engine to end all search engines (for the time being), but it remains richly priced. In the past six months, GOOG has not traded above $450 and the market seems to be in a sideways trading range as we proceed into summer. Investors who aren’t terribly optimistic about Google’s short-term potential may want to consider this bear call spread, which results in an initial credit in the investor’s account.

GOOG Credit Spread Trade Details:
*Sell and purchase prices derived from the bid and ask, respectively, at the time of publication.

GOOG shares are trading at $424.56.

Credit Spread/Bear Call Spread–

• Sell the August 460 call (out-of-the-money by 8.3%) for $6.80 per contract.
• Buy the August 470 call (out-of-the-money by 10.7%) for $4.80 per contract.
• Net credit of $2.00

The August 460 call is sold at the bid price and the August 470 call is purchased at the ask. When trading a credit or debit spread, it is sometimes possible to get a slightly better price on one of the legs. If the investor were to buy or sell closer to the "mid" price, the credit could conceivably be larger. In these examples, we assume the most conservative scenario – selling at the bid and buying at the ask.

Profit/Loss Details:

The maximum profit for this spread is the credit collected ($2.00 per spread) minus commissions. This is achieved at August expiration (August 21) if GOOG is trading below $460. GOOG is currently at $424.56, so that represents an increase of 8.3% off current levels. Bear call spreads are a moderately bearish strategy; those who expect further downside from GOOG could consider buying puts or other strategies that would have greater profit potential.

This credit spread’s maximum risk is the difference between the short and long strike (10) minus the credit collected ($2.00), or $8.00 (plus commissions). Because the credit received is smaller than the maximum risk (as is typically the case with credit spreads), most investors will opt to close the short option (the August 460 call) before maximum loss is reached should the trade moves against them.

Breakeven for this trade is the strike of the sold call (460) plus the premium collected, or $462.00.

If you aren’t a fan of the credit-spread strategy (or you have a different opinion of Google), keep an eye on the "Trading Idea" section of www.ONN.tv for more ideas, courtesy of the ONN Idea Generating Platform.