The market has had a great run in recent months and for those with a lot of bullish exposure, adding some bearish option trades can be a good way to hedge some of that exposure.
Intel was down over 4% on Friday and put in a bearish engulfing candle. So it could provide a nice bearish candidate.
Intel stock broke below the 50-day moving average and is still less than 6 points above the 200-day moving average. If the stock drops back town to that level, bearish option trades will do well.
A bear put spread is a debit spread. That means that we need to pay the premium to open the trade.
On Intel, a bear put spread could be set up using the 43 strike as the long put and the 38 strike as the short put for the June 21 expiration.
Max Potential Gain $320
This trade would cost around $180 per contract, with a maximum potential gain of $320.
To achieve the maximum profit, this trade would need Intel stock to drop 13.64% between now and expiration on June 21.
The break-even point for the bear put spread is 41.20. That's calculated as 43 less the $1.80 option premium per contract.
If Intel stock drops early in the trade, it may be possible to make a profit at slightly higher prices.
At expiration, if Intel stock is trading above 43, the entire spread would expire worthless. The trade would lose 100%, or $180.
How To Exit Intel Stock Option Trade
For a trade like this, I wouldn't bother with a stop loss. Either the trade works or it doesn't. So I would trade an appropriate position size in case I suffered the full 100% loss. Alternatively, you could set a stop loss at 50% of the premium paid.
Because this is a bearish position, traders who think Intel stock could move higher from here should not enter this trade.
According to the IBD Stock Checkup, Intel is ranked No. 4 in its industry group. It has a Composite Rating of 79, an EPS Rating of 68 and a Relative Strength Rating of 85.
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
