MicroStrategy has made a strong move in recent months. Perhaps it could keep going higher. Traders with a bearish view, however, may consider a short strategy in MicroStrategy stock with an options trade known as the bear put spread.
The bear put spread trade is a highly effective options tool to bet against stocks that investors think are overvalued. The most significant advantage of a bear put spread over shorting? Investors have a defined risk and reward. In contrast, short selling faces unlimited risk.
Shorting shares on a value proposition is especially difficult. If, for example, MicroStrategy stock price rises — with all other factors constant — it becomes even more overvalued. MicroStrategy stock has been soaring. It's moved up 20% in the last week and more than 235% year to date.
However, risk management principles should have investors cutting their position, not adding to it. Therefore, using the example of MicroStrategy stock, investors can use a bear put spread to make a bearish bet on the company while also limiting risk.
The founder and CEO of MicroStrategy, Michael Saylor, has led his company into the mainstream by transforming it from a small software name to a massive leveraged bet on the price of bitcoin. So far the strategy has been successful with MicroStrategy currently amassing an awe-inspiring $6 billion in assets primarily from retail investors wanting a leveraged bet on bitcoin.
MicroStrategy Stock: Worth Less Than Half Its Inflated Price?
The simplicity of MicroStrategy's business makes it easy to value, as the company's software segment is small and expected to only be valued at $200 million. The firm has 152,333 bitcoins, worth around $4.6 billion. That may not make the valuation seem insane — before you realize the company is also carrying around $2.2 billion in debt.
As it currently stands, one could make the argument that MicroStrategy stock is grossly overvalued and should be worth about half its current price, around $448.
MicroStrategy Stock Today: Setting Up The Trade
To construct a bear put spread in MicroStrategy stock, first buy a put option. Then simultaneously sell a put at a lower strike price with the same expiration. So, investors may consider buying a 420-strike put while selling a 400 put, both with a Dec. 15 expiration.
In recent trading, investors would have paid a debit of $970. This coincides with a maximum loss of $970 should MicroStrategy stock trade above 420 on expiration. The maximum gain is the width of the strikes minus the debit paid. In this case, a maximum gain of (20-9.7) x 100 = $1,030 gets realized if MSTR trades below 400 on expiration.
This trade should pay off if the price of MicroStrategy stock moves closer to its fair value without bitcoin rallying significantly in price.
Nevertheless, please note that the market can remain irrational longer than one can remain solvent. Therefore, investors should be prepared for the case that MSTR continues to remain grossly overvalued. That would result in the full loss of the premium paid.
