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3 Bear Trades to Make in Overbought Names Running Out of Gas

Bulls are running wild in tech stocks, but some tickers have become a little too hot to trot. And that has my inner contrarian perking up. Now, I know deploying bear trades on strong trending stocks is tricky, but I’m feeling clever, and I think technical conditions warrant it.

For starters, I like the relative weakness cropping up outside of tech. The Nasdaq made a new high on Tuesday, but the other major indexes didn’t. That means the market rally is narrowing. Next, the late-session selling on Tuesday caused many stocks to end with ominous-looking topping tails. Also known as upper shadows, these reversal formations are short-term bearish. Finally, many stocks are becoming overbought enough to justify betting on a pause or pull-back.

Rather than short the stocks outright, we’re harnessing the power of options to build higher probability bear trades. Here are three stocks that I have my eye on:

  • Spotify (NYSE:SPOT)
  • Electronic Arts (NASDAQ:EA)
  • Paypal (NASDAQ:PYPL)

One final reason for offering up a few bearish ideas is to allow you to diversify your trading account. Given the epic comeback in equities since March, I bet many portfolios are leaning a bit too bullish here.

Bear Trades to Consider: Spotify (SPOT)

Bear Trades to Consider: Spotify (SPOT)

SPOT stock has been on top of the world. It spent the past two years after its IPO going nowhere. But this year, a barrage of news has the music-streaming service rocketing to the moon. At Tuesday’s peak, SPOT’s year-to-date gains had ballooned to 72% with the lion’s share coming over the past two months.

Earnings in late-April started the ascent, and it has only accelerated after the company announced an exclusive deal with the Joe Rogan Experience podcast. The good news has continued with Spotify reaching yet another high profile podcast deal with Kim Kardashian West. And then there are the announcements that it’s going to start streaming on Comcast’s Xfinity devices, and that it will be the exclusive distributor of superhero podcasts from DC Entertainment.

But like Icarus of old myths, I suspect SPOT stock is flying too close to the sun. Apparently, some sellers think so too. They swarmed the stock intraday Tuesday creating a nasty looking bearish reversal candle. Couple that with the overbought conditions, and this seems like as good a time as any to enter a bear trade.

The Trade: Sell the July $270/$280 bear call spreads for around $1.75.

I’d bail quickly if you capture $1 of the potential $1.75 profit.

Electronic Arts (EA)

Bear Trades to Consider: Electronic Arts (EA)

Electronic Arts was quick to recover in the wake of March’s meltdown. Video game stocks, in general, were viewed as beneficiaries of the novel coronavirus and the stay-at-home and social distancing trends that emerged from the pandemic. But the trajectory of EA stock’s ascent has become unsustainable, which places it among the promising bear trades to make today.

Historically, when EA stock gets this overbought, we see a pause or retracement develop. Couple that with Tuesday’s bearish shooting star candlestick pattern, and the time is ripe to enter bear trades. To respect the strength of the overall uptrend, however, I don’t suggest buying puts. Instead, like SPOT stock, we’re entering bear call spreads.

The Trade: Sell the July $140/$145 for approximately 70 cents credit.

Consider it a bet that EA stays below $140. Rather than ride to expiration, consider taking profits if you capture 50 cents of the potential 70 cent gain.

Paypal (PYPL)

bear trades Paypal (PYPL) stock

The ascent in mobile payment stocks like PYPL stock and Square (NYSE:SQ) has been mighty impressive. PYPL stock is up almost fourteen straight weeks since the March low. Sure, we’ve had a few sideways shimmies in there, but the selling pressure has been weak at best.

In that three-month time frame, PYPL stock has more than doubled. I hate to say I’m relying on the stock’s overbought status to justify my bearish leanings, but that’s effectively what’s backing this contrarian bet. On top of the broader market developments mentioned in the intro, of course. With PYPL stock up six of the past seven days, I’m looking for a break of the previous day’s low to signal a pullback is developing. When that happens, here’s the bear call that interests me.

The Trade: Sell the July $185/$190 bear call for around 65 cents.

Once again, I suggest escaping as soon as possible with a 50 cent gain. That translates into a 10% return. You don’t want to overstay your welcome with these type of counter-trend plays.

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