MongoDB broke down to a new low Wednesday and continues to show a deterioration in relative strength.
Traders looking for a bearish option trade could look at a bear call spread on MongoDB stock.
A bear call spread involves selling an out-of-the-money call and buying a further out-of-the-money call.
The strategy can be profitable if the stock trades lower, sideways, and even if it trades slightly higher. That, as long as it stays below the short call at expiry.
A May-expiry bear call spread on MongoDB stock using the 400-410 strike prices could be sold for around $1.10 Wednesday.
Max Profit If MDB Closes Below 400
Traders selling the spread would receive $110 in option premium, which is also the maximum possible gain. The maximum loss would be $890.
The spread will achieve the maximum profit if MongoDB stock closes below 400 on May 17. In that case the entire spread would expire worthless, allowing the trader to keep the $110 option premium.
The maximum loss will occur if MDB closes above 410 on May 17. That would see the premium seller lose $890 on the trade.
While some option trades have the risk of unlimited losses, a bear call spread is a risk-defined strategy, and you always know the worst-case scenario in advance.
A stop loss could be set if MongoDB trades above 370, or if the spread value rises from $1.10 to $2.20.
Trade Equals Shorting Four MDB Shares
Because this is a bearish position, traders who think MongoDB stock could move higher from here should not enter this trade. The position starts with a delta of -4, meaning it is roughly equivalent to being short four shares of MongoDB.
According to the IBD Stock Checkup, MongoDB stock is ranked No. 10 in its industry group. It has a Composite Rating of 76, an EPS Rating of 80 and a Relative Strength Rating of 49.
MongoDB is due to report earnings around May 30, so this trade should not have any earnings risk.
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 X/Twitter at @OptiontradinIQ
