Overbought Stock of the Day: Spotify (SPOT)
Audio streaming giant Spotify (SPOT) has seen shares push to all-time highs in recent sessions. They have just surpassed prices set in early September. That move has been enough to send shares to overbought levels. A short-term drop may be in the works.
Shares have been range-bound since late June, and the company now trades at the top of its range. In the meantime, the recent rally in shares has been sufficient to provide a relative strength index reading of 72, just in overbought territory. Shares are trading above both major moving averages, with a potential downside of 10-15 percent likely in a drop.
Action to take: The January 2021 $250 puts would move in-the-money if shares dropped down to their 50-day moving average. That’s the first stop in a likely pullback where bulls may try to reassert themselves. Priced around $11.65 per contract on the bid/ask, the option can provide traders with mid-to-high double-digit returns depending on the speed and severity of the likely pullback.
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As with any out-of-the-money option trade, taking quick profits is essential. The option’s time premium decay will start to accelerate within the next month. Given the company’s current technical indicators, a drop should start before then, but look to exit the trade well before expiration.