Wow, what a day we had Tuesday! The consumer price index came in hot and sellers returned to the market in force.
Thankfully, we've been adding some protection trades recently that worked out very well.
Today, we're looking at another bearish trade idea, this time on Micron Technology. MU stock has been underperforming vs. its semiconductor counterparts in recent months.
On Tuesday, the stock dropped below the 50-day moving average in what could be a bearish sign.
Continued weakness in MU stock could provide traders with an opportunity to look at a bear call spread option trade.
A bear call spread involves selling an out-of-the-money call and buying a further out-of-the-money call.
Profits With Decline, Gain Or Sideways Move
The strategy can be profitable if the stock trades lower, sideways, and even if it trades slightly higher, as long as it stays below the short call at expiry.
A March expiry bear call spread on MU stock using the 85-90 strike prices could be sold for around $1.25 late Tuesday.
Traders selling the spread would receive $125 in option premium. That's also the maximum possible gain. The maximum loss would be $375.
The spread will achieve the maximum profit if MU stock closes below 85 on March 15. In that case the entire spread would expire worthless, allowing the trader to keep the $125 option premium.
The maximum loss would occur if MU closes above 90 on March 15. That would see the premium seller lose $375 on the trade.
While some option trades have the risk of unlimited losses, a bear call spread is a risk-defined strategy: You always know the worst-case scenario in advance.
Stop Loss For Option Trade
A stop loss could be set if MU stock trades above 85, or if the spread value rises from $1.25 to $2.50.
Because this is a bearish position, traders who think MU stock could move higher from here should not enter this trade. The position starts with a delta of -18, meaning it is roughly equivalent to being short 18 shares of Micron.
According to the IBD Stock Checkup, MU stock is ranked No. 6 in its industry group. It has a Composite Rating of 60, an EPS Rating of 3 and a Relative Strength Rating of 84.
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.
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 X/Twitter at @OptiontradinIQ
