After a tough couple of years, DocuSign is showing some signs of life and is back above the 21-, 50- and 200-day moving averages. It's set to report earnings on Thursday after the close, with an expected move of around 12.6%. This bull put spread fits the view that DOCU stock stays within the expected range and the response to the earnings report will likely to be positive.
Bull Put Spread Setup For DOCU Stock
As a reminder, a bull put spread involves selling a put and collecting premium while buying a put at a lower strike to manage risk. Since the lower strike will be a lower option premium, this spread provides a credit for the option trader.
So where do set the bull put spread for DOCU stock? Since earnings are coming up, we can start with a look at the expected move for DOCU stock on earnings. Taking the at-the-money put and call for the March 10 expiration, we see the expected range is 12.6%.
Now that we know the expected range, we can start our bull put spread on DOCU stock with a short strike roughly 12.6% below the stock price. Since DOCU stock finished at 64.15 yesterday, that puts the 56 strike in focus. We can create the bull put spread by selling the March 10 put at 56 and buying the 51 put with the same expiration.
Risks And Rewards
This spread on DOCU stock traded around 65 cents yesterday. That means a trader selling this spread received $65 in option premium. The maximum risk takes the difference of the strikes less the premium to get a result of $435.
The $65 max profit over the $435 risk gives you a 14.9% return on risk between now and Friday if DOCU stock remains above 56 at expiration.
If DocuSign closes below 51 on the expiration date, the trade loses the full $435. The bull put spread is a defined-risk trade; that means no matter how low the stock goes, that is the most you can lose on the trade.
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Managing The Trade
The break-even point for the bull put spread on DOCU stock is 55.35, which is calculated as 56 less the 65-cent option premium per contract. There is little room for adjustment with short-term trades such as this held over earnings. Short-term trades also contain assignment risk.
A 15% return in a few days would be nice, but the possibility of losing 100% is also very real.
As such, this style of trade is only for traders with high risk tolerance and requires an appropriate position size.
Depending on how DOCU stock trades today, traders may prefer to wait for a price higher than 65 cents for the spread, or they could adjust the strike prices.
According to the IBD Stock Checkup, DOCU stock is ranked No. 13 in its group and has a Composite Rating of 84, an EPS Rating of 83 and a Relative Strength Rating of 85.
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.
