Marvell Technology took a dive below its 50-day moving average Tuesday as growth stocks got clobbered by a wave of selling. Marvell stock now shows a weak Relative Strength Rating of just 49 from Investor's Business Daily.
This is the sort of setup to look for when scouting for bearish option trades.
Today, let's look at a setup known as a bear put spread. This is a bearish option trade that benefits from further downside in the stock price.
A bear put is a debit spread. That means we need to pay the premium in order to open the trade.
Why Marvell Stock Needs To Drop
On Marvell stock, investors could set up a bear put spread using the 70 strike as the long put and the 65 strike as the short put for the Oct. 17 expiration. Meanwhile, this trade would cost around $215 per contract of 100 shares with a maximum potential gain of $285.
To achieve the maximum profit, this trade would need Marvell Technology stock to drop a further 7.7% between now and expiration on Oct. 17. Also, the break-even point for the bear put spread stands at 67.85, or 70 minus the $2.15 option premium per share.
If Marvell stock drops early in the trade it may be possible to make a profit at slightly higher prices. At expiration, if Marvell trades above 70 at expiration, the entire spread expires worthless and the trade loses 100% or $215. The possibility of losing 100% might seem daunting but options allow you to risk less capital on the trade than with a stock purchase, and there is always the use of stop losses when things don't go your way.
Investors might set a stop-loss at 50% of the premium paid — in this case a loss of around $105. As this is a bearish position, traders who think Marvell stock could move higher from here should not enter this trade.
High Earnings, Low Relative Strength Ratings
The trade starts with a delta of -11, meaning the exposure is roughly equivalent to being short 11 shares of Marvell stock.
According to IBD Stock Checkup, Investor's Business Daily ranks the specialty-chip maker No. 15 in its group. Further, it has a Composite Rating of 82, an Earnings Per Share Rating of 96 and a Relative Strength Rating of 49.
Please 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, and is conservative in his style. He also believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.
