With the market uptrend under pressure, it may be time to start looking for some bearish option trade candidates.
General Electric (GE) stock is one that I’m looking after the recent rally failed at $8 and the stock is now back below the 200-day moving average.
GE stock has a paltry Composite Rating of 17, an EPS Rating of 15 and a Relative Strength Rating of 33.
For such a bearish-looking stock, it could be worth trading straight put options.
Put options give the holder the right, but not the obligation, to sell a certain underlying asset at a certain price on or before expiry. It’s a cheaper way to gain bearish exposure compared with selling short, and losses are limited to the premium paid.
With GE stock trading around 7.38 Monday, the Jan. 15-expiring put options with a strike price of 8 were trading for $1.12.
Put Option For GE Stock Costs $112
Traders buying this option would pay $112 per contract and that is the most they could lose. This would occur if GE stock closed above 8 on the expiration date.
To calculate the break-even price on the position we take the strike price of 8 less the premium paid of $1.12, which gives a break-even price of 6.88. Below that it is all profit.
Traders who want to offset the cost slightly could turn the trade into a bear put spread by selling the 6-strike price put for around 24 cents.
It’s shaping up to be a very interesting few weeks, with some key earnings announcements later this week and the election next week. Personally, I’ll be closing out a lot of positions and taking a wait-and-see approach.
It’s important to 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 Twitter at @OptiontradinIQ.
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View more information: https://www.investors.com/research/options/ge-stock-put-options-make-for-bearish-option-trade/