It's been a tough few weeks for Cathie Wood and the ARK Innovation ETF with the price down around 31% from the high set in February.
The option strategy I'm looking at is a diagonal put spread which is an advanced option strategy because it utilizes options over different expiration periods and different strike prices.
The trade I'm looking at is selling an ARKK April 16 90 strike put and buying a May 21 80 put.
As of yesterday, the April put could be sold for around 3.45 and the May put could be bought for 3.35.
The net credit on the trade would be $10 so the worst case scenario on the upside is that we make $10.
The risk on the trade is on the downside with a potential maximum loss of $990. This is calculated by taking the difference in the spread (10) multiplied by 100 and subtracting the premium received (100).
The ARKK Diagonal Spread Is An Advanced Options Trading Strategy
The maximum potential gain is around $450 which would occur if ARKK closes right at 90 on April 16. The trade has a nice profit zone in between 83 and 110.
Aiming for a return of around 10-15% makes sense and I would set a similar stop loss.
The worst-case scenario is a sharp drop in ARKK stock early in the trade. For this reason, if the stock drops below 90 I would also consider closing the trade early to minimize losses.
The initial trade set up has a delta of 4 meaning the position is roughly equivalent to owning 4 shares of ARKK stock. Note that this delta number can change significantly as the stock starts to move.
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
