Monday.com bounced back above its 50- and 200-day moving averages Monday in an explosive 10.50% move following the earnings report.
Traders who are willing to bet that MNDY stock will stay above the 50-day moving average for the next month or so could look at a bull put spread trade.
As a reminder, a bull put spread is a defined-risk strategy, so you always know the worst-case scenario in advance.
This type of trade will profit if Monday.com trades sideways or higher and even sometimes if it trades slightly lower.
With MNDY stock trading around 153, if we use the Dec. 15 expiration, we can sell a 150 put and buy a 145 put for around $1.80.
Trade Generates $180 In Premium
Selling this spread would generate roughly $180 in premium with a maximum risk of $320.
If the spread expires worthless, that would be a 56.26% return in around one month provided Monday.com is above 150 at expiration.
The maximum loss would occur if MNDY stock closes below 145 on Dec. 15. That would see the premium seller lose $320 on the trade.
The break-even point for the trade is 148.20. That's calculated as 150 less the $1.80 option premium per contract.
Setting Stop Loss On MNDY Trade
I would set a stop loss if Monday.com drops below 150. Otherwise, another good rule of thumb is to limit the loss to the amount of premium received. In this case, that would be $180.
Sticking to this stop loss level will help avoid large losses if the trade goes south.
According to the IBD Stock Checkup, MNDY stock is ranked No. 21 in its industry group and has a Composite Rating of 93, an EPS Rating of 81 and a Relative Strength Rating of 87.
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, 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
