The S&P 500 is weak, with IBD's recommend stock market exposure sitting at 20%-40%. One way to reduce your exposure is to selective add some bearish option trades to your portfolio.
Eli Lilly has been struggling since mid-August and is down 20% in the last three months. It sold off Tuesday on lowered guidance.
The stock is currently below the 21-, 50- and 200-day moving averages. Both the 21- and 50-day lines are trending downward, too.
If Eli Lilly continues to move lower, a bear put spread would be the best way to trade it.
A bear put spread is a debit spread. That means we need to pay the premium to open the trade.
On Eli Lilly, a bear put spread could be set up using the 700 strike as the long put and the 680 strike as the short put for the April 17 expiration.
Eli Lilly Stock Trade Max Profit
This trade would cost around $635 per contract, with a maximum potential gain of $1,365.
To achieve the maximum profit, this trade would need Eli Lilly to drop a further 8.7% between now and expiration on April 17.
The break-even point for the bear put spread is 693.65. That's the 700 put less the $6.35 option premium per contract.
If Eli Lilly drops early in the trade, it may be possible to make a profit at slightly higher prices.
At expiration, if Eli Lilly stock is trading above 700, the entire spread would expire worthless. The trade would lose 100%, or $635.
A stop loss could be set at 50% of the premium paid, which in this case would be a loss of around $320.
Because this is a bearish position, traders who think Eli Lilly could move higher from here should not enter this trade.
Eli Lilly Leads Industry Group
According to the IBD Stock Checkup, Eli Lilly is ranked No. 1 in its industry group. It has a Composite Rating of 69, an EPS Rating of 94 and a Relative Strength Rating of 41.
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
