With tech stocks looking a little fragile lately, it might be a good idea to look for bearish option trades in that space. Marvell Technology fits the bill as it recently dropped below the 200-day moving average yesterday. Here's how we can set up a bear call spread on MRVL stock.
Bear Call Spreads Take Advantage Of Time Passing
A bear call spread involves selling an out-of-the-money call and buying a further out-of-the-money call.
The strategy can be profitable if the stock trades lower, sideways or even if it trades slightly higher, as long as it stays below the short call at expiry. The passage of time works in your favor as the price of the spread loses time value as the expiration date approaches.
A September-expiry bear call spread on MRVL stock using the 75-80 strike prices can be sold for around 75 cents.
Traders selling the spread receive $75 per contract in option premium, which is also the maximum possible gain. The maximum loss is $425 per contract for this trade. That gets calculated by taking the width of the strikes, in this case five, and subtracting the premium received then multiplying by 100.
Risks And Rewards For Option Trade
The spread will achieve the maximum profit if MRVL stock closes below 75 on Sept. 20. In that case, the entire spread expires worthless, allowing the trader to keep the $75 option premium. So if MRVL stock jumps 15% from here, you could still leave this bearish trade with maximum profit.
If held until expiration, that maximum profit represents a potential return of 17.7% between now and Sept. 20.
The maximum loss occurs if MRVL stock closes above 80 on Sept. 20. That's where you would lose $425 on the trade. Keep in mind, nothing says you have to keep holding if the trade goes against you. You could cut your loss before then, either using the price of the stock or the price of the spread. A stop loss could be set if MRVL trades above 70, or if the spread value rises from 75 cents to $1.50.
While some option trades have the risk of unlimited losses, a bear call spread is a risk-defined strategy, and you always know the worst-case scenario in advance.
As this is a bearish position, traders who think MRVL stock could move higher from here should not enter this trade.
MRVL Stock And Chips On The Rocks
According to IBD Stock Checkup, MRVL stock ranks No. 14 in its group. The chip designer has a Composite Rating of 56, an EPS Rating of 68 and a Relative Strength Rating of 42. These lackluster ratings make it a candidate for a bearish trade.
Marvell is due to report earnings in early August, so this trade would have earnings risk if held to expiration.
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
