With the market getting pummeled on Monday, there was one group of stocks that stood out — utilities. And NextEra Energy stock in particular had a fantastic day, as it surged 4.6% to move past 76 and reclaim its 200-day moving average on strong volume.
A price level at 70 could prove to be strong support for NextEra investors going forward. So it's a good bet that further downside from here will be limited. Thus, traders looking for a more conservative way to play NextEra stock using options could use a bull put spread.
A bull put spread is a defined risk strategy, so investors always know the worst-case scenario in advance. This type of trade will profit if NextEra stock trades sideways or higher. It also works even if it sometimes trades slightly lower.
Traders that think NextEra Energy will stay above 60 for the next few months could sell an April 17 bull put spread at 70-65 for around 50 cents. Selling this spread would generate roughly $50 in premium with a maximum risk of $450.
If the spread expires worthless, that still would bring an 11.1% return in one month. That assumes NextEra Energy stock remains above 70 at expiration.
NextEra Stock: Maximum Loss at $450
The maximum loss would occur if NextEra Energy stock closes below 65 on April 17. In that case, the premium seller would lose $450 on the trade.
The break-even point for the trade comes in at 69.50, which equals 70 less the $0.50 option premium per contract. That's also 8.7% below yesterday's closing price.
It's best to set a stop loss if the stock breaks back below the 200-day moving average, currently around $74.50. Sticking to this stop loss level will help avoid large losses if the trade goes south.
How NextEra Shares Rank
According to the IBD Stock Checkup, NextEra stock is ranked number 10 in its group. Further, it has a Composite Rating of 86, an EPS Rating of 78 and a Relative Strength Rating of 61.
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 and is very 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
