When scanning through some popular stocks, one in particular stands out for its recent strong price action: Robinhood Markets. If traders were looking to put some money to work, this could be a good candidate.
And traders looking for a more conservative way to play Robinhood stock using options could use a bull put spread.
Robinhood stock jumped nearly 8% on Friday and also shows signs of strong accumulation. According to IBD Stock Checkup, HOOD currently has a mildly positive C+ Accumulation/Distribution Rating.
Strategic product diversification and strong retail trading activity are helping to drive the bullish momentum. The company recently launched "Robinhood Strategies," an actively managed robo-advisor, as part of its expansion into the wealth management and banking sectors.
A bull put spread is a defined-risk strategy. Investors always know the worst-case scenario in advance. This type of trade will profit if Robinhood stock trades sideways or higher. It also works sometimes if shares trade slightly lower.
Maximum Risk Is $400
Traders who think Robinhood stock will stay above 35 for the next few months could sell a June 20-expiring 35-30 bull put spread for around $1, based on recent trading. On Monday afternoon, that spread increased to $1.14. Selling this spread, which involves selling the 35-strike put and simultaneously buying the 30 put, would generate roughly $100 in premium per set of put options. This means the trade also carries a maximum risk of $400.
Meanwhile, if the spread expires worthless, that would be a 25% return in two months. That assumes Robinhood stock is above 35 at expiration. The maximum loss would occur if Robinhood stock closes below 30 on June 20. In that case, the premium seller loses $400 on the trade.
The break-even point for the trade is 34, which is calculated as 35 less the $1 option premium per contract. Further, that's 22% below Friday's closing price.
It's best to set a stop loss if the stock breaks back below 37.50, or if the spread increases in value from $1 to $2. Also, sticking to this stop-loss level will help avoid large losses if the trade goes south.
Ratings For Robinhood Stock
According to IBD Stock Checkup from Investor's Business Daily, Robinhood stock ranks No. 4 in its group. HOOD has a Composite Rating of 95, an EPS Rating of 80 and a near-perfect Relative Strength Rating of 98.
Please remember that options are risky. Further, 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, and is conservative in his style. He believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.
