Trade idea for Applied Materials (AMAT) downgrade

Applied Materials (NASDAQ: AMAT) shares are falling today after an analyst at Citi downgraded the stock to "Hold" from "Buy" and cut their price target on the stock to $20 from $25, citing a decline in semiconductor orders from chip-makers. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on AMAT.

After hitting a one-year high of $23.00 in August, the stock hit a one-year low of $16.13 in January. This morning, AMAT opened at $17.32. So far today the stock has hit a low of $17.25 and a high of $18.06. As of 12:25, AMAT is trading at $17.654, down 70 cents (-3.8%). The chart for AMAT looks bullish but deteriorating, while S&P gives the stock a positive 4 STARS (out of 5) buy rating.

For a bearish hedged play on this stock, I would consider an October bear-call credit spread above the $22 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 7.1% return in three months as long as AMAT is below $22 at October expiration. AMAT would have to rise by more than 24% before we would start to lose money. Learn more about this type of trade here.

AMAT hasn't been above $22 since last August and has shown resistance around $21 recently. This trade could be risky if the company's earnings (due out in mid-August) are a positive surprise, but even if that happens, this position could be protected by resistance AMAT might find at its 200 day moving average, which is currently around $19 and falling.

Brent Archer is an options analyst and writer at Investors Observer.

DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in AMAT.