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This Option Trade Has 55% Return On Risk In Less Than A Month

Affirm Holdings (AFRM) exploded in popularity with option traders in recent weeks. Yesterday, Affirm stock saw over 133,000 option contracts traded with 75% of them call options. That’s about twice the 90-day average option volume.

AFRM stock is also a high volatility stock. That usually means higher option premiums. The bull put spread takes advantage of the volatility by selling premium for a credit. It’s good for traders who expect Affirm stock to rally further or at least not fall by much.




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Bull Put Spread On Affirm Stock

To execute a bull put spread, an investor would sell an out-of-the-money put and then buy a further out-of-the-money put. The short put is the bullish position and the long put caps your risk.

For Affirm stock, selling the 150 put and buying the 140 put with a Nov. 19 expiration creates a bull put spread.

This spread was trading around $3.55 yesterday. That means a trader selling this spread received $355 in option premium. If Affirm stock finishes above 150 at expiration, the option trader keeps the premium and that’s the maximum profit.

To find the maximum risk, take the difference of the strikes and subtract the premium received. That comes out to $645 and occurs if AFRM stock closes below 140 at expiration.

The return on risk is 55% return on risk between now and Nov. 19.

If Affirm stock closes below 140 on the expiration date, the trade loses the full $645.

The break-even point for the bull put spread is 146.45, which is calculated as 150 less the 3.55 option premium per contract.

This bull put spread trade has a delta of 12 which means it is similar exposure to owning 12 shares of Affirm stock. Keep in mind, this exposure will change over time as the stock price moves.

In terms of a stop loss, if AFRM stock drops below 150, I would close the trade early.

Affirm is set to report earnings in early December, so this trade shouldn’t have any earnings risk.

Past Option Trades Revisited

In addition to the current option trade idea on Affirm stock, it’s worth looking at how to manage some of the recent ideas from this column.

A bullish calendar trade on Upstart (UPST) is performing well and can be closed for a nice profit. However, this Tesla (TSLA) iron condor was a bust with the stock ramping up too much on the upside.

The bull put spread on First Solar (FSLR) and another bull put spread on Digital Turbine (APPS) did well and can be closed early for a profit.

This bull call spread on Advanced Micro Devices (AMD) is showing a profit of $200 per contract with only $120 profit potential per contract remaining. It could be closed early as well ahead of earnings.

Please remember that options are risky, and investors can lose 100% of their investment.

This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.

Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ

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