Snowflake tumbled Wednesday as growth stocks took a big hit.
SNOW stock is also showing weak relative strength and is below the 21- and 50-day moving averages.
Traders who think Snowflake will not reclaim the 50-day line in the next few weeks could look at a bear call spread option trade.
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.
A SNOW stock bear call spread using the Aug. 18 expiry and the 180-185 strike prices could be sold for around $0.75 late Wednesday.
Max Profit If SNOW Closes Above 180 At Expiration
Traders selling the spread would receive $75 in option premium which is also the maximum possible gain. The maximum loss would be $425.
The spread will achieve the maximum profit if SNOW stock closes below 180 on Aug. 18. In that case, the entire spread would expire worthless, allowing the trader to keep the $75 option premium.
The maximum loss will occur if Snowflake closes above 185 on Aug. 18. That would mean premium sellers lose $425 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 the spread value rises from $0.75 to $1.50, or of SNOW crosses back above 175.
Still Bullish On SNOW Stock? Skip This Trade
Because this is a bearish position, traders who think SNOW stock could move higher from here should not enter this trade.
According to the IBD Stock Checkup, SNOW stock is ranked No. 51 in its industry group and has a Composite Rating of 71, an EPS Rating of 43 and a Relative Strength Rating of 67.
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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, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
