Snowflake put in a bearish candle on Friday as the stock market entered a correction. Traders that think SNOW stock will not reclaim the 200-day line in the next few weeks could look at a bear call spread trade in options.
SNOW stock is also showing weak relative strength. The database analytics powerhouse is also trading significantly below the 21-day exponential moving average, as well as its 50- and 200-day simple moving averages.
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. The key? You can make money so long as it stays below the short call at the option expiration date.
SNOW Stock Today: The Bear Call Spread
Let's view a bear call spread in SNOW stock by using the Nov. 17 expiry and focusing on the 160 and 165 strike prices. Together, they can be sold for around $1.15.
Therefore, traders selling the spread would receive $115 in option premium. That also pinpoints the maximum possible gain. The maximum loss? Take the difference between the strike spread of 5 minus or $1.15 for the pair of contracts traded to get $3.85 per share, or $385 for a block of 100 shares.
The spread will achieve the maximum profit if SNOW stock closes below 160 on Nov. 17, in which case the entire spread would expire worthless, allowing the trader to keep the $115 option premium.
The maximum loss will occur if SNOW closes above 165 on Nov. 17, which would see the premium seller lose $385 on the trade.
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Risk Defined
While some option trades have the risk of unlimited losses, a bear call spread is a risk-defined strategy, and you always know the worst-case scenario in advance.
A stop loss could be set if the spread value rises from $1.15 to $2.30, or if SNOW crosses back above 155.
As this is a bearish position, traders who think SNOW stock could move higher from here should not enter this trade.
According to IBD Stock Checkup, SNOW stock ranks 33rd in its group. Snowflake also has a Composite Rating of 76, an EPS Rating of 81 and a Relative Strength Rating of 43.
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
