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Trade Of The Week: Bear Put Spread on Woolworths Limited

March 10, 2021

Trade Of The Week: Bear Put Spread on Woolworths Limited

Woolworths has seen red candles for the past 7 consecutive trading days amid gapping open prices. The stock has also seen price action between the 50 Day MA and 200 Day MA for 15 of the last 16 trading days.

Woolworths has seen red candles for the past 7 consecutive trading days amid gapping open prices. The stock has also seen price action between the 50 Day MA and 200 Day MA for 15 of the last 16 trading days.

The market is currently struggling to push through this 50 Day MA resistance and may soon feel some fatigue and fall toward the 200 Day MA, potentially breaking through this support level. The stock has recently gone ex-dividend so it will be trading at lower levels.

Source: Implied Volatility 

So this week we will look at a bearish spread on Woolworths Limited (ASX:WOW). A bear put spread is a two-legged trade. The first leg will be an at-the-money long put to benefit from a falling market. The second leg will be an out-of-the-money sold put, to generate some upfront premium, lowering the overall cost of the bearish strategy.

Source: Implied Volatility 

The reason we have selected the bear put spread (rather than the bear call spread) is because options are relatively cheap on WOW currently (IV rank is 12) and the implied volatility value is naturally quite low for Woolworths, currently at 22.5. When options are cheap, it can be a great time to buy. When options are expensive, it can be a great time to sell.

Based on today’s closing price of $38.90, we will set the strike price of the long put to $39.00 (at-the-money), and the sold put to $38.00 (slightly out-of-the-money). We will set the expiry to the 15th of April 2021 in order to slow the rate of time decay on the position.

Source: Implied Volatility 

The maximum profit of $4,425 will be realised if the stock is trading below $38.00 upon expiry. The maximum loss of $3,075 will be realised if the stock is trading above $39.00 upon expiry.

We will be looking for a quick move down to $38.00 and once the market hits this level, you can close the position to lock in the profit.

 

For further information on using the Implied Volatility platform you can follow this link, here.

To try trading for yourself using the most powerful Options Trading technology in Australia, click here for a trial for our Implied Volatility platform

We wish you good luck with your trading, and as always if you have any questions, please feel free to contact our trading desk on (03) 8080 5795. Please note, we provide General Advice only.

 

Past performance is not a reliable indicator of future performance. 

The opinions expressed in this article are our personal views.

Trading options is not suitable for everyone. There is a risk that you can lose more than the value of a trade or its underlying assets. You should only trade if you are confident that you fully understand what you are doing. If you are thinking about acquiring a financial product, you should consult our Financial Services Guide (FSG) at www.reachmarkets.com.au first. 

 


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