Lam Research is consolidating gains and recently earned a spot on the SwingTrader Portfolio. So we're looking at a bull put spread in LRCX stock.
As a reminder, a bull put spread is a defined risk strategy, so you always know the worst-case scenario in advance. This type of trade will profit if LRCX stock trades sideways or higher — and even sometimes if it trades slightly lower.
LRCX Stock Today: Setting Up The Trade
Lam Research specializes in silicon wafer fabrication equipment and services and has 10 primary locations throughout the U.S. Austria, Malaysia, South Korea and Taiwan.
Stock Market Forecast For The Next Six Months
With LRCX stock trading around 626, let's focus on options that expire July 21.
We can sell a 580-strike put and buy a 575 put for a total of around 85 cents per contract as of recent action on Monday afternoon. Selling this spread would generate roughly $85 in premium with a maximum risk of $415.
If the spread expires worthless, then it translates into a 20.5% return in one month — provided Lam Research trades above 580 at expiration.
The maximum loss would occur if LRCX stock closes below 575 on July 21. In this case, the premium seller would lose $415 on the trade.
How To Limit Risk
The break-even point for the trade is 579.15. Calculate it by taking the upper strike price of 580, less the $0.85 option premium per share for the contract.
I would set a stop loss if LRCX stock drops below 585. Otherwise, another good rule of thumb is to limit the loss to the amount of premium received, which in this case would be $125.
Sticking to this stop-loss level will help avoid large losses if the trade goes south.
According to IBD Stock Checkup, LRCX stock ranks No. 7 in its group. It has a Composite Rating of 96, an EPS Rating of 89 and a Relative Strength Rating of 92.
By Monday's end, the premium that could be received from this trade reached 98 cents, based on the midpoints of the best bid and best ask prices for both the 575 and 580 option strikes.
Please remember that options are risky, and investors can lose 100% of their investment.
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 Twitter at @OptiontradinIQ
