Is this rally sustainable? The bulls sure seem to think so! Time to check out Google!

Given the oversold conditions the market has been experiencing over the past several weeks, this rally could have some legs. I always say that when everyone in the market is bearish, its time for you to turn bullish and vice versa. Where do I think the best opportunity lies to capitalize on an upswing in the market while minimizing downside risk? I believe technology offers the biggest bang for the buck. Flushed with cash and hence, meticulous balance sheets, many technology companies could ride this wave higher beautifully. Today let's look at Google (symbol: Goog). While Google has significantly underperformed its peers this year, I believe that for this reason the Company is poised for a considerable rally. By putting their cash chests to work, Google is clearly positioning itself as a market leader (both through acquisitions and internal infrastructure investment) and the Options market allows investors to cheaply take advantage of the rally this stock is poised to experience (in my opinion).

Let's take a look at the Jan 2011 550/600 Call spread. This spread costs just $4.90 with almost $45 of upside!! What does this mean? This means that 10 contracts cost just $4,900 (+ commissions) for almost $45 of potential upside if the stock were to close at $600 at Jan 2011 expiration which is over 4 months away. Now does the stock have to close at $600 to make money? Of course not, we would be more than happy with a close of $590 :). But in all seriousness, if the stock were to push $500 within the next few weeks, we could easily see a 30% - 50% appreciation on our initial investment.

I have highlighted the specifics of the trade below:

Stock: Google
Strategy: Buy 550/600 Call Spread
Cost: $4.90 (based on yesterdays closing price)
Maximum upside potential: ~$45 or 9X!!!


I this trade still too expensive? We can sell the the $360 strike Jan 2011 put for a credit of $5.10 making the above trade almost free!! Whats the downside? It's that you would have to get long the stock if it were to close below $360 by Jan 2011 expiration which is almost 26% lower than the $470 Google is currently trading at. That wouldn't be such a bad entry point now would it?!