Given its sizable quarterly earnings gaps and somewhat erratic price movement, Google (NASDAQ:GOOG) hasn�t exactly been the go-to stock for momentum players. With the likes of Apple (NASDAQ:AAPL) and Chipotle Mexican Grill (NYSE:CMG) vaulting to new highs virtually every day, most traders have found easier plays elsewhere.
Yet, on rare occasions, the king of search has provided an alluring setup worth considering. One of these infrequent low-risk, high-reward opportunities appears to be in the making right now.
Click to Enlarge After a partial recovery from its January earnings gap lower — the stock lost 8.4% on Jan. 20 after its Q4 earnings announcement — GOOG has been wrestling with technical resistance at its pivotal 50-day moving average. The last three weeks of sideways churn have set up a clean high base, which could spell higher prices once resolved. In fact, a breakout above $615 could lead to a complete fill of the stock�s gap and pave the way for a move up to the $640 area.
While the higher price tags of the Googles and Apples of the world tend to turn off (or flat-out exclude) undercapitalized stock traders, they can offer great vehicles for spread trades.
A bull call spread provides a cheap, straightforward avenue for capitalizing on a coming breakout in GOOG. Traders could buy to open the April 610 call while selling to open the April 630 call for a net debit of around $9.60 per spread.
The maximum risk is limited to the initial $9.60 paid and will be incurred if GOOG is trading below $610 at April expiration (April 20). The max reward is limited to the distance between strike prices (630-610) minus the net debit, or $10.40. Profits are maximized if GOOG is trading above the sold strike (630) at expiration.
Breakeven is the strike of the purchased call plus the total premium paid, or $619.60. That�s a move of only about 1.7% from current levels, and the stock has almost two months to deliver this upside.
In timing the entry, traders should consider waiting for a confirmed break of resistance around $615. On Monday, Google ended the session at $609.31.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
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