Today, we're looking at a bull put spread idea on Arista Networks.
Arista stock is back above the 21- and 50-day moving averages and there is strong support at 290.
Traders who are willing to bet that Arista stock will stay above 290 for the next few weeks could look at a bull put spread trade.
As a reminder, a bull put spread is a defined-risk strategy, so you always know the worst-case scenario in advance.
This type of trade will profit if Arista stock trades sideways or higher and even sometimes if it trades slightly lower.
With ANET stock trading around 306, if we use the April 19 expiration, we can sell a 290 put and buy a 285 put for around $1.20. Selling this spread would generate roughly $120 in premium with a maximum risk of $380.
Return Of 31% In Four Weeks
If the spread expires worthless, that would be a 31% return in four weeks. That's provided Arista stock is above 290 at expiration.
The maximum loss would occur if the stock closes below 285 on April 19. That would see the premium seller lose $380 on the trade.
The break-even point for the trade is 288.80. That's calculated as 290 less the $1.20 option premium per contract.
I would set a stop loss if the loss is equal to the amount of premium received. In this case that would be $120.
Sticking to this stop loss level will help avoid large losses if the trade goes south.
Arista No. 1 In Its Industry
According to the IBD Stock Checkup, Arista is ranked No. 1 in its industry group. It has a Composite Rating of 98, an EPS Rating of 98 and a Relative Strength Rating of 95.
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
