Last updated on May 14th, 2020
To take advantage of a potential move lower in the market, we are looking at buying Put Options on DIA for our Options Trade Of The Week.
Buying Put Options is an aggressive trade looking for a move lower. It’s a break from the Credit Spreads that we have been trading the last few Trades Of The Week.
Why Are We Taking This Options Trade?
Over the last month we have seen a trade agreement between the U.S. and China, the Fed announced another round of Quantitative Easing and a whole slew of earnings releases out of the big market-moving stocks. As a result, stocks are making another run-up to all-time highs.
In the near term, this has us incredibly overbought and due for a pause or even a pullback over the next month. During this latest move higher, we have seen the volatility crushed and volume has completely dried up. Just this past week we have seen some of the lowest volume of the year. This leads us to believe the market is getting tired.
Buying Put Options, in this case, will leave us with a higher risk/higher reward scenario. I like this trade as market pullbacks tend to be swift. This trade will allow us to make money faster on any selling that we see over the next week or two.
Full Options Trade Details
For this trade we are:
- Looking at the November monthly options that have 21 days left to expiration.
- Looking to buy the 267 puts as long as the price of DIA gets below $266.29.
- We should be able to buy the puts for around $3.00 or $300 per contract.
Our max risk on the trade will be whatever we pay for the options. However, we like to limit our losses to 50% of what we pay for the options.
We will be targeting a 100% return on the position. Using a 2:1 reward to risk ratio allows us to put the numbers in our favor long term.
For a complete break down of our Trade Of The Week make sure you review the video below.
You will learn the details of how we are placing trade including how we plan on managing it from start to finish.
If you are interested in learning how to find these trades, feel free to contact me directly with any questions you might have. Mike@netpicks.com.