Zscaler stock is putting in a nice series of higher lows and higher highs while also breaking out to a multiweek high. A late-January high of around 205 also offers a potential level of support.
Zscaler Stock Today: The Bull Put Spread
As a reminder, a bull put spread is a defined-risk strategy. You always know the worst-case scenario in advance. The trade starts by selling a put at a higher strike and buying a put with the same expiration at a lower strike. Since the sold put has more premium, this ends up giving the trader a net credit on the spread. The long put offers protection in case the stock falls more than anticipated.
Traders that think Zscaler will stay above 205 for the next few weeks could sell a Feb. 21, 205-200 bull put spread for around $1.20.
This type of trade profits if the stock trades sideways or higher and even sometimes if it trades slightly lower.
Selling this spread generates roughly $120 in premium with a maximum risk of $380.
If the spread expires worthless that would be a 31.6% return in two weeks, provided Zscaler stock is above 205 at expiration.
Managing Risk
The maximum loss occurs if Zscaler closes below 200 on Feb. 21. But since the risk is defined, no matter how far it falls the loss is capped at a $380 loss per contract.
In terms of risk management, I would set a stop loss if the loss is equal to the amount of premium received. In this case that's $120.
The break-even point for the trade is 203.80, which is calculated as 205 less the $1.20 option premium per contract. Again, Zscaler can drop quite a bit and still come out ahead on the trade.
According to IBD Stock Checkup, Zscaler ranks No. 1 in its group and has a Composite Rating of 95, a perfect EPS Rating of 99 and a Relative Strength Rating of 70.
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
