Datadog (DDOG) stock was a bearish candidate that came up on one of my Barchart Stock Screeners having broken below the 50-day moving average.
Here are the full parameters for the screener and the results.
Today, we’re going to look at a Bear Call spread trade that assumes DDOG will struggle to get back above the 21-day moving average in the next few weeks.
A Bear Call spread is a bearish trade that also can benefit from a drop in implied volatility.
The maximum profit for a Bear Call spread is limited to the premium received while the maximum potential loss is also capped. To calculate the maximum loss, take the difference in the strike prices of the long and short options, and subtract the premium received.
DDOG BEAR CALL SPREAD
To create a Bear Call spread, we sell an out-of-the-money call and then by another call further out-of-the-money.
Selling the January 31 call with a strike price of $150 and buying the $155 call would create a Bear Call spread.
This spread was trading for around $1.25 yesterday. That means a trader selling this spread would receive $125 in option premium and would have a maximum risk of $375.
That represents a 33% return on risk between now and January 31 if DDOG stock remains below $150.
If DDOG stock closes above $155 on the expiration date the trade loses the full $375.
The breakeven point for the Bear Call spread is $151.25 which is calculated as $150 plus the $1.25 option premium per contract.
COMPANY DETAILS
The Barchart Technical Opinion rating is a 64% Buy with a Weakening short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
Datadog Inc. is a monitoring and analytics platform for developers, IT operations teams and business users in the cloud age.
The company's business runs around its portfolio of over 400 out-of-the-box integrations including public cloud, private cloud, on-premise hardware, databases and third-party software.
The company's Software as a Service platform integrates and automates Infrastructure Monitoring, Application Performance Monitoring, Log Management, User Experience Monitoring, Network Performance Monitoring, Security Monitoring, Incident Management and Continuous Profiler that can be used individually or as a unified solution by customers.
The company has a single operating and reportable segment. Solid uptake of its cloud-based monitoring and analytics platform also helped Datadog strengthen customer base.
Datadog generates revenues from the sale of subscriptions to customers using its cloud-based platform.
Datadog is showing implied volatility of 35.76% and an IV Percentile of 40%.
Datadog is due to report earnings in mid-February, so this trade should have no earnings risk if held to expiration.
Conclusion And Risk Management
One way to set a stop loss for a Bear Call spread is based on the premium received. In this case, we received $125, so we could set a stop loss equal to the premium received, or a loss of around $125.
Another stop loss level could be if the stock broke above $148.
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.
