Amid a struggle lately by former market leaders such as Zoom stock to move higher, it might be good to look at some bearish option trade candidates. That’s the beauty of options, you have the potential to make money in up, down and sideways markets.
Zoom stock could be a good candidate given that it recently hit resistance at a declining 21-day exponential moving average. The growth stock has also been trading below the 200-day moving average since March 3.
Implied volatility is in the lower end of the 12-month range, so I would favor a bear put spread over a bear call spread.
A bear put spread is a debit spread. This means we need to pay the option premium to open the trade.
If we place the bear put spread out-of-the-money we have a trade with low cost and high reward potential if the stock drops.
Zoom Stock: The Bear Put Spread
On Zoom stock, you could set up a bear put spread by using the 280 strike price as the long put and the 270 strike as the short put, both expiring on May 21. In other words, buy the 280 put, then simultaneously sell the 270 put option. Since Zoom is currently trading at 314, or above these two put option strike prices, these options are out of the money. The stock would have to drop for these two put options to go in the money, or become profitable.
This trade would cost around $290 per contract with a maximum potential gain of $710.
To achieve the maximum profit, this trade would need ZM stock to drop at least 14% between now and expiration on May 21. The break-even point for the bear put spread is 277.10, which is calculated as 280 less the cost of $2.90 in option premium per contract.
Profits Begin Here
If ZM stock drops early in the trade it may be possible to make a profit at slightly higher prices. At expiration, if ZM is trading above 280, the entire spread would expire worthless and the trade would lose 100% or $290.
For a trade like this, I probably would not bother with a stop loss. Either the trade works or it doesn’t. So I would trade an appropriate position size in case I suffered the full 100% loss.
Zoom’s next quarterly report is likely to arrive around May 31, so there is no earnings risk with this trade.
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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