Although options open the door to a range of compelling trading opportunities, they can be incredibly complicated. That’s where Barchart’s options tools – found near the bottom of the company’s screeners section – comes into play. By identifying the trades for you, much of the guesswork is taken out, allowing you to focus on the most enjoyable aspect of trading: securing a profit.
Case in point is the high-flying aerospace and defense specialist Intuitive Machines (LUNR). Part of the burgeoning space economy, Intuitive designs, manufactures and operates space systems and infrastructure, enabling scientific and human exploration.
Fundamentally, the arena generates plenty of excitement thanks to its massive potential. In 2019, The Space Foundation notes that the sector reached a valuation of $428 billion. By 2035, the World Economic Forum believes the industry could be worth $1.8 trillion.
On a technical level, LUNR stock shot up over 125% since the beginning of this year. While the price action has been choppy, Intuitive has benefited from a recent resurgence in momentum. In the past five sessions since Thursday’s close, the security gained over 31% of value. Still, the main concern for speculators just entering the field is the uncertainty of its continued forward trajectory.
Broader data suggests that the economy may not be as resilient as once thought. Per the AP, “[t]he U.S. economy added 818,000 fewer jobs from April 2023 through March this year than were originally reported.” That’s a sizable negative revision, which could mean that a recession may not be that far-fetched of a proposition. If so, betting on a high-risk idea like LUNR stock could be treacherous.
But that’s also where the options market comes into play.
Go Beyond a Simple Directional Wager with a Bull Put Spread
At the most basic level, traders can either buy call options or put options on LUNR stock. The former platform gives holders the right but not the obligation to buy the underlying security at the listed strike price. Regarding the latter, holders have the right (but not the obligation) to sell LUNR at the contracted strike.
A pure directional wager (up for calls, down for puts) gives holders an all-or-nothing opportunity. So, why should investors consider a bull put spread? Simply, traders are never 100% sure about their bets. Therefore, a bull put spread mitigates this uncertainty by offering a hedged wager: a trader is betting that the underlying security will stay above a defined level to be profitable.
In exchange, the trader must pay a premium for a hedge. This hedge limits downside risk but also limits upside rewards. It’s arguably ideal for a wildly fluctuating LUNR stock, where the trader has some idea that it will not drop below a certain price but wants to take precautions, just in case.
Following Thursday’s close, Barchart identified the following bull put spread idea for LUNR stock:
- Leg1 (Short Put): Sell a put expiring Sept. 20, 2024 with a strike price of $4 and a bid of 30 cents.
- Leg2 (Long Put): Buy a put expiring Sept. 20, 2024 with a strike price of $3 and an ask of 10 cents.
- LUNR stock closed in the open market at $5.32 on Aug. 22, 2024.
Here’s how the mechanics of this bull put spread will work:
- Sell the put option with the $4 strike (Leg1) and receive a premium of $30 (30 cents x 100 shares).
- Buy the put option with the $3 strike (Leg2) and pay a premium of $10 (10 cents x 100 shares).
- The net credit will be the difference between the two metrics or $20.
To profit, LUNR stock must stay above $4 by the expiration date. In that case, both options will expire worthless. However, because the premium received is greater than the premium paid for the hedge, you end up as a net winner.
Of course, the risk is that LUNR stock drops below $4. But because of the long put, the downside is limited to the difference in strike prices subtracted by the premium received for the sold put, which is as follows: ($4 - $3) – 20 cents = 80 cents. Since options are tied to 100 shares, the maximum loss is $80 per every spread contract acquired.
Will LUNR Stock Stay Above $4?
While the bull put spread sounds enticing, the tactic raises an obvious question: will LUNR stock stay above the $4 level? It’s impossible to say with certainty. However, there appear to be several support lines in place that make a drop below $4 unlikely.
First, LUNR stock breached the psychologically significant $5 level. For Intuitive to drop back down below $4 – let alone the $3.80 breakeven line – would first require the bears to drive below $5. That in itself would likely be a significant challenge.
Second, the pessimists would need to drive LUNR stock below the $4.50 level. That’s also a strong support line which will not be easy to defeat. Third, the $4 threshold also commands much interest – it’s possible that the bulls placed buy orders at this price. So, even if the bears managed to plunge shares to this point, a strong bounce back may materialize.
So, what’s the advantage of a bull put spread? You have a lot more opportunities to win. In the case of LUNR stock, buying shares outright at $5.32 and hoping that it moves higher is a risky proposition because they’ve already moved so much.
Further, buying the put spread here gives you the cushion for the equity to fall to $3.80 without incurring a loss. On the flipside, if you bought LUNR stock at $5.32 and it fell to $3.80, that would be a 28.57% loss – a truly bad day at the office.
The bottom line is this: Barchart Screeners demystify the options market, identifying compelling opportunities with predefined risk and reward parameters.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
