Morgan Stanley stock is currently ranked No. 1 in the Banks-Money Center industry group with a Composite Rating of 94, an EPS Rating of 88 and a Relative Strength Rating of 89 according to the IBD Stock Checkup.
With a three-year sales growth rate of 24% and an annual return on equity of 9.1%, Morgan Stanley is an ideal candidate for a bullish option trade.
When looking at bull put spreads, we normally keep our days to expiration around 30 to 60 days. However, today we're going to look at a much longer-term example.
Longer-term trades, have a lower annualized return, but they also move a bit slower and require less active management.
As a reminder, to execute a bull put spread an investor would sell an out-of-the-money put and then buy a further out-of-the-money put.
Let's go out to April next year and look at selling the 105 put and buying the 100 put.
This spread was trading late Wednesday for around $1. That means a trader selling this spread would receive $100 in option premium and would have a maximum risk of $400.
Trade Represents 25% Return On Risk
That represents a 25% return on risk between now and April next year if Morgan Stanley remains above 105.
If the stock closes below 100 on the expiration date the trade loses the full $400.
The breakeven point for the bull put spread is 104. That's calculated as 105 (the strike of the sold put) less the $1 option premium per contract. The breakeven price is 11.8% below Wednesday's closing price.
This bull put spread trade has a delta of 6. That means it is a similar exposure to owning six share of Morgan Stanley, although this exposure will change over time as the stock price moves. Long-term put spreads like this will be less sensitive to changes in the stock price.
In terms of a stop loss, if the spread increased in price from $1 to $2, I would consider closing early for a loss.
Morgan Stanley Trade Has Earnings Risk
With such a long time to expiration, there may be two earnings releases that this trade would be exposure to if held to expiry.
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.
