Snowflake dropped 1.7% on Friday after having broken below its 21-day moving average on Thursday as growth stocks struggled at the end of the week.
The recent high around 230 could provide resistance in the short-term. So with that in mind, Snowflake is a good candidate for a bearish option trade.
Let's examine a bear call spread that assumes Snowflake stock will struggle to get back above the 230 level between now and mid-August.
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.
Using The Bear Call Spread On Snowflake Stock
An Aug. 15 expiration on a bear call spread for Snowflake stock — using strike prices at 230 for the short call and 240 for the long call — traded around $1.65 this morning. Traders selling the spread would receive $165 in option premium which is also the maximum possible gain on a 100-share contract. The maximum loss would be $835.
That represents a potential return of 19.8% between now and Aug. 15. The spread will achieve the maximum profit if Snowflake stock closes below 230 on Aug. 15, in which case the entire spread would expire worthless, allowing the trader to keep the $165 option premium.
The maximum loss occurs if Snowflake closes above 240 on Aug. 15, which would see the premium seller lose $835 on the trade. That's simply the 10-point difference in strikes less the premium received multiplied by 100.
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 Snowflake trades above 230, or if the spread value rises from $1.65 to $3.30.
Taking Advantage Of Market Consolidation
Bear call spreads can be a good way to potentially generate some income while the market consolidates recent gains.
According to Investor's Business Daily's IBD Stock Checkup, Snowflake stock ranks No. 7 in its group. Also, it has a Composite Rating of 90, an Earnings Per Share Rating of 47 and a Relative Strength Rating of 93.
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 also believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.
