Amid a market that has taken investors on its own version of Mr. Toad’s Wild Ride, tech giant Google (NASDAQ:GOOG) has been quietly advancing. Its recent rise from the October abyss has brought it to a key multi-year resistance level.
The $630 price area has acted as an impenetrable ceiling, halting each and every attempt from the search behemoth to return to its all-time highs north of $700. If GOOG is finally able to break out in the coming weeks, higher prices are likely to follow.
Unfortunately, many traders become quickly discouraged by the expensive price of GOOG stock and conclude they are unable to participate. But option traders know that spreads provide the ability to structure cheap trades on stocks that appear out-of-reach for the undercapitalized retail trader.
Consider the following bull-call spread idea, for example. You could buy to open the GOOG March 640 Call and, at the same time, sell to open the GOOG March 660 Call for around $8 ($28.60 – $20.60).
The max risk comes out to $800 and will be incurred if GOOG remains below $640 at March expiration. The max reward is capped at the distance between strike prices ($660 – $640 = $20) minus the net debit, which comes to $1,200 ($20 – $8 = $12). The maximum reward is captured if GOOG resides above $660 at March expiration.
The cost of the trade is equivalent to purchasing about 1 and 1/3 shares of stock — cheap by just about any standard. By going out to March, traders allow GOOG plenty of time to stage its advance higher. As is the case with any breakout pattern, traders need to wait for prices to break through resistance before pulling the trigger.
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