With market volatility increasing, I'm looking for some potential bearish candidates. Strategy, formerly known as MicroStrategy, has been trending lower since mid-November. So let's view a bear call spread trade in Strategy stock.
On a daily chart, Strategy stock is stuck below a declining 21-day exponential moving average as well as the 50-day moving average. MSTR on Monday tested the bulls at the long-term 200-day line.
Also, the 50-day moving average recently sat around 325. That price level could provide some short term resistance on the upside.
Strategy, as a company, holds the largest corporate bitcoin treasury, and its stock price is thus closely linked to bitcoin's performance. On Monday afternoon, bitcoin fell more than 4.4% to $78,634.
With the stock under pressure, I'm willing to bet that Strategy stock will trade sideways at best over the next few months. It could struggle to get back above the 370 level between now and mid-April.
Strategy Stock Today: The Setup
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, and even if it trades slightly higher, as long as it stays below the short call at expiry.
An April 17 expiring bear call spread on MSTR stock using the 370-375 strike prices recently sold for around $0.95 a share. Traders selling the spread would receive $95 in option premium per set of contracts. That serves as the maximum possible gain. The maximum loss would be $405. That represents a potential return of 23.5% between now and April 17.
The spread will achieve the maximum profit if MicroStrategy stock closes below 370 on April 17. In this case, the entire call spread would expire worthless. The trader gets to keep the $95 option premium per set of contracts. The maximum loss will occur if MSTR closes above 375 on April 17, which would see the premium seller lose $405 on the trade. A stop loss could be set if Strategy stock trades above 330, or if the spread value rises from $0.95 to $1.80.
Inside Investors.com: Is Strategy Paying The Price After Spending $21 Billion On Bitcoin?
Current Strike Prices To Consider
Given the sharp drop in Strategy stock Monday, traders could also eye a call spread using the 325 and 330 strikes.
According to IBD Stock Checkup, MSTR ranked 29th in its industry group. It shows a Composite Rating of 53, an EPS Rating of 5 and a Relative Strength Rating of 97.
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.
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
